The Deficit and Your Portfolio

Now, these numbers are all forecasts, of course, and are subject to the usual problems with forecasts. For instance, the White House budget assumes that the U.S. economy will grow by 3.6% in fiscal 2004 (remember that's the 12 months starting in October 2003) and by an average of 3.3% a year for the fiscal years 2004 to 2008. Inflation will stay at a low 2.1% in fiscal 2004 and average 2.2% for the period. Interest rates for the 10-year Treasury note will hit 5% in fiscal 2004 and average 5.2% for the period.

Shift any of these assumptions and the end result bears little resemblance to the current projections.

Change the time period and the budget forecast looks totally different as well. The budget produced by the White House this year has a serious case of back-loading costs. For example, the Bush administration has proposed creating vast new categories of savings and retirement accounts that would have the effect of exempting gains from taxation when they're withdrawn at some point in the future.

According to the budget, these proposals have no net cost because taxes paid in the early years by investors converting from current IRAs and the like to the new plans would offset any revenue losses from forgone taxes on distributions. And because the projections in this year's budget stop after five years with fiscal 2008, the heavy losses of tax revenue produced after 2008 don't count.

This kind of back-loading of costs produces especially large distortions, because the Bush budget team released budget estimates for just the next five fiscal years instead of the 10-year projections in use beginning in 1996. The White House is perfectly correct in saying that the country got along with five-year budget projections from 1971 to 1995, but the change comes at an awkward moment in the fiscal life of the federal budget, because it is the period after 2010 that will see the big explosion in costs for health care and retirement as the "boomer" cohort shows its age.