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After posting the latest version of my Debt, Taxes and Politics, I've received several emails asking for a comparison of the six-year forecasts of Federal Debt to GDP in the 2011 budget (last year's) with the 2012 budget released on February 15th. How well has the Office of Management and Budget handled Debt-to-GDP forecasts? Here's a side-by-side comparison.
The first thing that jumps out is the 12% increase in the actual Debt-to-GDP ratio from 2009 to 2010 (93.3% divided by 83.3% minus one equals 12.0%). That's substantial, but it's actually less than the 13.2% estimated GDP increase (up to 94.3%) forecast in last year's budget.
We also see that the curve of the six-year estimates in the 2012 budget is more optimistic than last year's gaze into the crystal ball. Yes, the 2012 numbers are higher, but the ratio flattens out and falls slightly from the 106% forecast peak in 2013.
Of course a few years from now we may look back on the 2012 budget estimates as completely off-base. Future events may push the estimates in a different direction, as we saw for the rolling debt estimates before and after the Financial Crisis (discussed here).
Actually, Debt-to-GDP estimates (the side-by-side charts above) have twice the complexity of the Gross Federal Debt estimates. The Office of Management and Budget team has to take a stab at both GDP and Federal Debt.
The Big Picture
We've been focusing on the current and future Debt-to-GDP, so let's close with a backward look at the ratio since the time of Teddy Roosevelt.
Not immediately obvious in this chart is the fact that the Federal Debt peak associated with World War II was higher than the 106% forecast for 2013 for a mere two years. In 1945 and 1946 the ratio spiked to 116.0% and 121.3%, respectively.
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