Some Good News on the Deficit? (Video Added)
July 11 (Bloomberg) — The Bush administration cut its estimate of this year’s budget deficit by 30 percent to $296 billion amid a surge in tax collections from corporations and wealthy individuals.
The projected shortfall is down from the $423 billion deficit the White House forecast five months ago and represents 2.3 percent of gross domestic product, according to the Office of Management and Budget. Last year’s deficit was $318 billion.
But in the next paragraph we get the political talking points,
President George W. Bush today pointed to the decline, contained in a mid-year review required by law, as evidence that tax cuts enacted in his first term are benefiting the economy.
This is the conservative talking point with regards to this good news, but the problem is that it is hard to tell if it was the tax cuts. While the tax cuts probably did help keep the recession short and shallow, the idea that 4 years latter they are just now causing the receipts to increase is highly suspect. The problem is that tax receipts follow the business cycle: tax receipts fall during a recession and rise during an expansion. The economy would have recovered from the recession without the tax cut, and receipts would have risen anyways. To what extent receipts are no higher than they otherwise would be is highly debatable. Basically, some of the increase may be due to the tax cuts, but it is far, far less than Bush and other conservative commenters are implying.
This part is also interesting,
Democrats immediately disputed Bush’s view of the revised forecast. They accused the administration of overestimating the deficit at the start of the year so it could now boast about the drop in the forecast and said the revenue increases show the tax cuts mostly benefited corporations and the wealthy.
Lets check with the Congressional Budget Office, a government entity the Bush Administration likely has little control over. According to the budget outlook for 2006 in January of 2005 the projected 2006 deficit was $295 billion. Hmmm, that does look somewhat like somebody projected a higher number initially knowing that the actual number would be much lower. Of course, the CBO number does exclude the additional funding for Iraq, Afghanistan and Katrina. The August Update to the Budget and Economic Outlook did have a slightly higher number of $314 billion. And the January 2006 Budget and Economic Outlook had the 2006 deficit at $337 billion. So, is it a case of high balling the forecast knowing that a lower deficit would result? Maybe, but I’m going to say no on this one.
What is more disconcerting in the Bloomberg article is the information about the retirement of the first wave of Baby Boomers,
The U.S. is about 18 months away from the first retirement wave of what will be 77 million baby boomers, triggering an explosion of Social Security, Medicare and Medicaid spending.
“No economic boom can provide even a significant fraction of the revenue needed to cover this coming entitlement spending,” said Brian Riedl, a budget analyst at the Heritage Foundation in Washington.
Right here is where the mendacity of lower taxes/higher revenues mantra shines through. If the mantra is correct we’d better set taxes to 1% right now so that revenues will be high enough to cover these looming costs.
On top of this there is the problem with the spending by Congress,
Riedl was among the analysts who said they are concerned that the jump in revenue is masking a lack of budget discipline.
“One hundred percent of the reduction comes from higher tax revenue and not from any spending restraint by Congress,” Riedl said yesterday. “I worry about lawmakers congratulating themselves.”
Chris Rupkey, senior financial economist at Bank of Tokyo- Mitsubishi UFJ Ltd. in New York, said the prospect of more government spending clouds his forecast for a $300 billion deficit for the year. “The revenue side of the ledger has improved dramatically, but we still don’t have a firm grasp on the outlay side,” he said.
So while the news is indeed good, it needs to be taken in context of unrestrained spending by both the President and Congress. In addition, there is the not to distant problem of retiring Baby Boomers that will cause an increase in both Medicare and Social Security spending. Right now I’m rather pessimistic on the budget outlook for the future and we’ll likely see some tax increases in the not too distant future.
UPDATE (Greg Tinti): Here are some of the main points from President Bush’s speech today on the economy:
Also, a full transcript can be read at the White House’s website here.
Update (Steve Verdon): Here is a rather discouraging projection from that well known liberal think tank the Heritage Foundation,
Long-term growth in Social Security, Medicare and Medicaid “threaten to force either European-style tax increases, unprecedented spending cuts or unprecedented debt,” said Heritage Foundation budget expert Brian Riedl. “There’s no growing out of the long-term budget problems.”
Heritage sees an $800 billion deficit in 2016, assuming tax cuts are extended and spending stays on its present course. If the economy and tax receipts continue to outperform, the deficit would still be at least $600 billion, Riedl said.