As with his various “plans” to cut the federal budget deficit in half, President Bush’s budget makes a series of implausible assumptions in order to project a return to surplus by 2012, as the Center on Budget and Policy Priorities notes:

* The budget implicitly includes the assumption that the Alternative Minimum Tax will be allowed to explode and will affect more than 40 million households in 2012, something no one believes will happen. The budget includes the cost of AMT relief only through 2007, but omits the cost of AMT relief in the years after that. The Congressional Budget Office says that the cost of continuing this relief is $93 billion in 2012 alone, if the President’s tax cuts are extended.

* The budget also rests on the shaky assumption that the deep cuts scheduled under current law in payments made to doctors for services they provide to Medicare patients will actually take effect. No one believes this will happen either. This assumption makes up to $20 billion in additional 2012 costs disappear.
* The budget also omits all costs for the Global War on Terror after 2009, which could run into the tens of billions of dollars in 2012.
* Finally, the budget employs rosy revenue assumptions; it assumes at least $150 billion more in revenue in 2012 than CBO does for the same policies.

The Financial Times has an appropriately skeptical article:

This deficit dynamic is substantially driven by the way the budget accounts for the cost of the wars in Iraq and Afghanistan. It accounts for these costs in full in 2008 and sets aside $50bn to cover unforeseen war-related expenses in 2009, but makes no provision for one-off war costs in 2010 or beyond.

Whether actual war-related spending will follow the path set out in the budget is debateable, raising one source of uncertainty as to its fiscal forecasts.

More broadly, most of the deficit reduction is supposed to take place after Mr Bush leaves office and achieving this is cause for some scepticism.

The White House set out to show that it is possible to balance the budget by 2012 while making the Bush tax cuts permanent. The budget indeed does this, though the fiscal maths rests on certain assumptions, some of which – like the rapid decline in war costs – look optimistic.

The biggest assumption is that it is possible to hold non-security discretionary spending growth to 1 per cent in nominal cash terms. That means real terms cuts every year for five years – a degree of sustained spending restraint which is unprecedented in recent times.

Then, the White House assumes the economy will grow faster than the non-partisan Congressional Budget Office estimates in 2007 and again from 2011 onwards.

The budget has growth averaging 3 per cent from 2008 to 2012, which is probably a small fraction faster than the Federal Reserve now thinks is sustainable.

In addition, the budget makes no allowance for the cost of indexing the Alternative Minimum Tax (AMT) beyond 2008 to prevent it drawing in an increasing number of middle class Americans.

This is legitimate in one sense, as Mr Bush has called for a “revenue-neutral” AMT fix. But it would be politically very difficult for Congress to find revenue increases to offset fully the cost of an AMT fix.

If Congress continues to patch the AMT year by year, as it has in recent years, the deficit will be significantly larger in each year from 2009 onwards than the budget forecasts.

The changes to Medicare and other entitlement programmes – which are significant in fiscal terms at the 2012 mark and hugely important thereafter – may also be difficult to get through Congress.

On the plus side, the budget includes an allowance for the cost of moving to private accounts in Social Security, which is unlikely to happen, leaving some cash on the table.

Also, the White House has not made very aggressive assumptions about growth in tax receipts in the light of the positive revenue surprises of the past couple of years.

This is in line with mainstream economic thinking, but it remains possible that there could be more tax buoyancy ahead, because of the share of income gains going to corporations and higher rate taxpayers.

Even if this materialised, though, it would very likely not be enough to make up, for instance, for any ongoing post 2009 war costs, inability to hold non-security discretionary spending growth to 1 per cent or failure to implement a cost-neutral AMT fix.