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CBO knows its deficit forecasts are too cheery. So what will really happen?

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Charles Dharapak/AP

(Read caption) Senate Budget Committee Chairman Kent Conrad, D-N.D., speaks on Capitol Hill in Washington, Thursday during a hearing on the Congressional Budget Office's Budget and Economic Outlook: Fiscal Years 2011-2021.

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The US government will run a $1.1 trillion deficit in fiscal year 2012, according to the Congressional Budget Office‘s just-released Budget and Economic Outlook. Measured as a share of the nation’s economic output – which is how economists like to measure it – the FY 2012 deficit will constitute 7 percent of US Gross Domestic Product. That’s down a tick from 2011, when the deficit ran to 9 percent of US GDP.

Well, it looks like things are getting a bit better, red ink-wise. What’s going to happen in the budgeter’s magical world of the out years, the fiscal years to come?

According to CBO’s basic forecast, deficits will start to plummet. They will drop below $200 billion annually in fairly short order. Between 2013 and 2022, deficits would average only 1.5 percent of GDP, under CBO’s current-law projection.

Wow! That’s great, right? So everything’s under control. Nothing to see here in the budget. Move along, folks. Why, over there, we notice an exciting proposal to build a US colony on the moon over there – why don’t you go gawk at that?

Not so fast. Here’s the problem: CBO’s basic forecast is almost certainly wrong – and the folks at CBO, from the director on down, know it.

That’s because CBO has to build its forecasts based on current law. At the moment, existing law calls for a number of fiscally exciting things to happen. Bush-era tax cuts are supposed to expire, for instance.

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