Some Good News on the Deficit? (Video Added)

The projected budget deficit for FY 2006 has been cut to $296 billion.

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.

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Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. madmatt says:

    And lets not forget that this doesn’t include “emergency spending” so tack on a couple billion more for the war!!!

  2. cirby says:

    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.

    That’s an insane oversimplification of what the point really is, and not at all what people actually claim. This is a true straw man argument, and I’m surprised to see it here.

    It’s not an either/or case of either 100% taxes or 1% taxes. The whole point of the (one more time) Laffer Curve is that there’s a point where higher taxes actually create less government income, due to the economy being starved of the cash it needs to function well. Historically, taxes in the US (and, indeed, most “modern” countries) have been too high, as witnessed by the increase in government revenues when taxes have been cut.

  3. ken says:

    Tax cuts have never led to higher revenue. Deficit spending is what stimulates the economy, not tax cuts.

    This whole discussion with conservatives about taxes and revenue is impossible as they are just too stupid to deal with reality.

  4. TJIT says:

    I have a hard time following this logic. The congress has a spending problem therefore we must raise taxes so they have more money to spend.

    Could we please realize deficits are a simple math problem

    tax revenue – spending amount = deficit.

    Let’s acknowledge that fixing the revenue side of the equation without addressing the spending side guarantees that deficits will continue to be a problem.

  5. cirby says:

    Tax cuts have never led to higher revenue. Deficit spending is what stimulates the economy, not tax cuts.

    Well, it’s nice to know that you’ve managed to come up with a counter for the last half-century of modern economics. Which would be what, exactly? A blind faith that the current level of taxation is divinely inspired, and neither too high or too low?

  6. MrGone says:

    This is fabulous news. Of the top five deficits in US history, W owns 4 including this one. Daddy owns #5.

    Cirby, take a look at this set of slides from the well known “liberal” Heritage Foundation:

    http://www.heritage.org/research/features/BudgetChartBook/charts_C/c1.cfm

    Then come back and explain to me how the Republicans and conservatives demonstrate better stewardship over the tax/spend issue.

  7. Steve Verdon says:

    Cirby,

    Thatâ??s an insane oversimplification of what the point really is, and not at all what people actually claim. This is a true straw man argument, and Iâ??m surprised to see it here.

    Actually, I disagree strongly here. Sure it is an insane oversimplification, but the problem lies with those on the right who always argue that cutting taxes raises revenues. I’ve heard Sean Hannity make the claim, Larry Elder, and others as well. There is no tax cut that I have heard people say on the right say, “Well, yeah it will lead to deficits, but….”

    Itâ??s not an either/or case of either 100% taxes or 1% taxes. The whole point of the (one more time) Laffer Curve is that thereâ??s a point where higher taxes actually create less government income, due to the economy being starved of the cash it needs to function well. Historically, taxes in the US (and, indeed, most â??modernâ?? countries) have been too high, as witnessed by the increase in government revenues when taxes have been cut.

    Thanks, I never new that about the Laffer curve.[/sarcasm] As for the higher revenues, I’d like you to post at least three decent studies making that case.

    TJIT,

    I have a hard time following this logic. The congress has a spending problem therefore we must raise taxes so they have more money to spend.

    Uhhhmmm, I’m having a hard time finding that in my post.

    Ken,

    Tax cuts have never led to higher revenue. Deficit spending is what stimulates the economy, not tax cuts.

    Thanks for demonstrating the silly economics is also a problem for the Left. Sure tax cuts provide stimulus.

  8. TJIT says:

    Steve,

    Look toward the end of your post where you said:-)

    “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.”

    I realize your post was related to the impact of tax rates on tax revenue and you are not specifically making the argument that spending restraint is not important.

    However, everybody needs to realize that until we get some restraint on spending, especially entitlement spending, raising taxes is only a transient solution. The politicians inevitably spend everything the additional taxes bring in plus a little more then we end up hearing about the need for more taxes to cover the deficit.

  9. ken says:

    Steve, idiot.

    When the federal government borrows money to buy things and hire people the federal government also gets tax revenue right along with those products and employees.

    When the federal government cuts taxes it always has and always will result in a reduction in revenue unless it is offset by an even bigger deficit stimulas.

    Because we have never had a federal tax cut without an even largher offsetting massive increase in deficit spending you have mistakenly credited the tax cuts instead of the deficit spending for the increased revenue.

  10. Steve Verdon says:

    TJIT,

    When I mentioned tax hikes, I wasn’t advocating them, but seeing them as an inevitable result of the current spending path we are on. I hope this clears that up. I’d much rather restrain spending than raise taxes, but I fear that is never going to happen.

    Ken, hyperventilating.

    Ken, I don’t deny that spending can act as a stimulus. Why you felt I held this position when there is nothing I’ve written to indicate such a position is your problem.

    When the federal government cuts taxes it always has and always will result in a reduction in revenue unless it is offset by an even bigger deficit stimulas.

    ROFL. Okay, is this some sort of inverse Laffer curve or something. Enough deficit spending and the economy will grow so fast that deficits will be eliminated? Maybe we can call it the Ken Kurve or something.

  11. cirby says:

    Thanks, I never new that about the Laffer curve.[/sarcasm]

    Well, you keep ignoring it, and can only seem to come up with weak and/or silly counterarguments (“1%,” for example).

    As far as tax cuts resulting in more income, there’s the Reagan years and the current Bush years. I doubt we could find a good third example in national politics, since it’s been tried so seldom. In state politics, Florida had some huge tax cuts over the last few years, and revenue is booming, to say the least, along with a very good overall economy.

    And yes, the increases in income were more than offset by spending. This is what’s known as “another question entirely.”

  12. Steve Verdon says:

    Cirby,

    Please, I fully understand the Laffer curve, it is conservatives like you who don’t.

    I see you’ve got precisely nothing when it comes to cutting taxes and tax revenues. In fact, Greg Mankiw notes that income taxes only pay for about 17% of the lost revenues.

    From the link,

    According to the researchers, the neoclassical growth model and all of its variants indicate that the dynamic response of the economy to tax changes is substantial. In almost all instances, they find, tax cuts are at least partly self-financing. The authors conduct some simple calculations, plugging in numbers that approximately describe the U.S. economy. They find that, in the long run, about 17 percent of a cut in labor taxes is recouped through higher economic growth.

    When it comes to capital gains taxes, the results are more in favor of tax cuts in that 50% of the cut is recouped.

    Your examples make no attempt to disentangle things like the normal rise and fall of tax revenues due to the business cycle. You credit it all to tax cuts which is very misleading.