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Monday, April 1, 2013

Within 25 years interest may be more than revenue

A new site page shows  government data indicates within the next decade the federal government may be spending more on entitlement programs and interest  than it receives in revenue. It couldn't spend money on anything else and balance the budget. Within the next 10-25 years (forecasts vary) simply the interest on the debt may be more than revenue. The budget couldn't be balanced even in theory which means the country would have effectively gone bankrupt   before that. 

Politicians didn't learn enough from the financial crisis. Many people  lost houses when they couldn't afford rising mortgage costs. Often they  overestimated their future earnings and underestimated expenses. Its understandable to dream about what could be done with a higher income, but its best to use conservative estimates when planning budgets.  Federal agencies aren't doing a good   job of  considering the possibility of lower income and higher expenses
Last year the Federal Reserve published a study "How Good Are the Government’s Deficit and Debt Projections and Should We Care?" which looked at the track record of the  Congressional Budget Office projections from the last few decades. They compared them with "random walk" (RW) projections, i.e.   random guessing, and found  that

"the CBO’s cumulative 5-year projections are considerably worse than projections from the RW model; [...]the deficit projections beyond a year were unreliable. Importantly, we found that the projections were biased in the direction of underprojecting the size of the deficit or overprojecting the size of the surplus."

Since the CBO tends to be overoptimistic, it is useful to consider more conservative projections combining other government data. People in business often plan by exploring best, expected and worst case scenarios because they know the future is hard to accurately predict.The new page goes into detail  and provides an interactive graph of future federal finances where assumptions can be changed.

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