If you want to get good and depressed, go the Web site of the Office of Management and Budget and spend some time browsing through the plethora of materials related to the 2011 federal budget. That’s what I’ve being doing for the past couple of days, and, boy oh boy, it wasn’t much fun. Even if the economic recovery continues at a healthy clip, with annual GDP growth averaging about four per cent over the next five years, the budget deficit, currently running at about $1.55 trillion, will still be $700 billion in fiscal 2014, and thereafter it will start climbing again, reaching $1 trillion in 2020. As a share of GDP, the Administration is projecting that the deficit will fall from 10.6 per cent this year to 3.9 per cent in 2014, but by 2020 it will have risen back to 4.2 per cent.

To finance the deficit, the Treasury will have to issue more debt—trillions of dollars worth of it. Between 2010 and 2020, according to OMB’s figures, the amount of federal debt outstanding will rise from fifty-three per cent of GDP to seventy-seven per cent, a level not seen since the aftermath of the Second World War. The White House’s numerical projections stop at 2020, but, largely due to an explosive growth in Medicare and Medicaid spending, the fiscal outlook thereafter is even more bleak—something Tea Party sympathizers, devotees of Rubinomics, and progressives can agree upon.

“If we continue current policies, the federal debt will skyrocket from 53 percent of GDP at the end of fiscal year 2009 to more than 300 percent of GDP in 2050,” the liberal Center on Budget and Policy Priorities warned in a recent report. “That would be almost three times the existing record … and would threaten significant harm to the economy. In addition, under current policies, the annual budget deficit is projected to exceed 20 percent of GDP by 2050.” In the Financial Times earlier this week, the economists Carmen Reinhart and Kenneth Rogoff, the authors of an excellent book on the history of financial crises, pointed out that debt-to-GDP ratios of ninety per cent or higher are often associated with extended periods of economic stagnation. Once the debt-to-GDP ratio approaches triple figures, the specter of sovereign defaults appears—witness the current problems of Greece and Iceland.

Got the message? In case you haven’t, Peter Orzag, the Administration’s coltish budget director, said this in a blog post on Tuesday: “Let’s be clear: even with the substantial—and historic—deficit reduction proposed in this year’s Budget, we will still face unsustainable medium- and long-term deficits. And the Administration knows that more will need to be done to restore the nation to a fiscally sustainable path.”

Now, you (or I) might question whether budgeting for an increase in annual spending of $944 billion, or twenty-five per cent, over five years—from $3,721 billion in 2011 to $4,665 billion in 2016—amounts to “historic” deficit reduction. (As recently as 1985, the entire federal budget was $946 billion.) But for now, let’s put that aside and, just for fun, try to find some good news in the fiscal tea leaves. Surely it should be possible to say something positive. And, yes, if I try hard I can suggest at least four arguments that can be used to put some positive spin on these dreadful figures. Two of these arguments are associated with famous political figures; a well-known economic forecaster was responsible for another; and one isn’t associated with anybody in particular, so I’ll attribute it to myself.

I was right. Dick Cheney was right. Winston Churchill was right. Victor Zarnowitz was right.

The Cassidy thesis: In a post last week, I suggested that multi-year budget projections sometimes aren’t worth the paper they are printed on, citing as an example the infamous Clinton OMB budget projection from 2000, which foresaw a decade of healthy surpluses. That was an extreme example of how wrong forecasts can turn out to be, but it was far from atypical.

The problem isn’t that budget forecasters are incompetent, but, rather, that the task they set themselves is inherently very difficult. This is partly because the deficit isn’t a thing in itself: it is the difference between two much larger figures that themselves vary considerably—total federal spending and total federal receipts. Because of its residual nature, even relatively small movements in spending or receipts can have a drastic impact on the deficit.

In fiscal 2007, for example, the federal government spent $2,729 billion and took in $2,568 billion, recording a deficit of $161 billion. (These figures include Social Security payments.) The following year, as the economy entered a recession, federal spending rose to $2,983 billion and receipts fell to $2,524 billion, producing a deficit of $459 billion. Expressing these figures in another way, between 2007 and 2008 spending rose by roughly nine per cent and receipts fell by roughly two per cent, but the deficit increased by 185 percent!

To produce a deficit projection, you first have to forecast future spending, which involves making guesses about future policies and future GDP growth that are almost certainly going to be wrong. Then you have to repeat the exercise for total receipts. Given the nature of the exercise, the only reasonable question isn’t whether budget forecasters are going to be able predict deficits accurately three, five, or ten years ahead—they aren’t—but how far off their figures are going to be. History shows the answer is a lot. Since 1982, the five-years-ahead deficit forecast has understated the actual outcome by an average of about $200 billion. Most of the time, the projections were too low, but during the mid-to-late nineties they were too high.

In short, deficit forecasts should be treated with extreme caution—something the OMB acknowledges in an analytical annex to the budget report, where it provides not just a specific deficit forecast but also a range of possible outcomes that is highly likely to include the actual outcome. Statisticians call such a range a “confidence interval.” If a confidence interval is narrow, a specific forecast carries some credibility. If a confidence interval is wide, the forecast is much less reliable.

Now let’s look at the Administration’s predictions for fiscal 2015, five years hence. The forecast for the deficit is 3.9 per cent of GDP, but the ninety per cent confidence interval—i.e., the range of possible outcomes that has a 9 in 10 chance of including the actual outcome—goes from a surplus of 2.6 per cent of GDP to a deficit of 10.4 per cent of GDP. This is not merely wide: it is a gaping chasm! And what it means is that, based on past experience, pretty much anything could happen.

The Cheney thesis: If the preceding argument is too nihilistic for your tastes, by all means ignore it and take the White House deficit projections seriously. (After all, they are broadly in line with what most independent forecasters are saying.) But don’t forget the words that Vice-President Cheney reportedly uttered to then Treasury Secretary Paul O’Neill in 2002: “Reagan proved deficits don’t matter.”