Deficit, What Deficit?
It might be a bit cynical to call President Bush's new budget "dead on arrival." But the myriad proposals on everything from the Pentagon to the National Park Service are certainly going to get massaged a bit–mutilated in some cases, probably–by the new Democratic-controlled Congress. One thing you can bank on, though, is that when all is said and done, nixed, or negotiated, Uncle Sam will still be spending more than he takes in. According to the latest projections by the nonpartisan Congressional Budget Office, the federal budget deficit will be $172 billion this year, about 1.3 percent of gross domestic product.
Still, those are hardly scary numbers for a $13.5 trillion economy. "The magnitude of the current deficit is nothing to be concerned about," says Jared Bernstein, an economist at the liberal Economic Policy Institute. And overall, the deficit is half of what it was in 2004, thanks to booming tax receipts. What Americans might want to instead be concerned about is the $50 trillion in future liabilities that they as taxpayers face from Social Security and Medicare–including the new prescription drug plan–according to data from the U.S. Government Accountability Office.
The federal budget was in surplus to the tune of $127 billion in fiscal 2001 as Bush took office. Since then, the government has racked up hundreds of billions in new debt. The Bush tax cuts of 2001 and 2003 are obvious culprits. "Tax cuts on wages such as those enacted in 2001 have certainly reduced tax revenue from the level it would hypothetically have reached absent tax cuts," notes economist Curtis Dubay of the Tax Foundation. Yet despite those rate cuts, revenues are up $551 billion, or 27.8 percent, since 2001. And at 18.4 percent of GDP, federal tax revenues in 2006 were a bit the above the 20-year, 40-year, and 60-year historical averages, which range from 17.9 to 18.3 percent. But while revenues have risen smartly, spending has risen twice as fast, increasing by $851 billion, or 45.6 percent. So as Dubay figures it, for every additional dollar the government brought in since 2001, it spent $1.54. The wars in Afghanistan and Iraq, the new Department of Homeland Security, and Hurricane Katrina–it all adds up.
If all goes according to the plan outlined in the Bush budget, deficits should continue to head downward until the budget is balanced in 2012. As Bush said last month, "By balancing the budget through pro-growth economic policies and spending restraint, we are better positioned to tackle longer-term fiscal challenges facing our country, namely the entitlement programs." Yet if Washington does nothing different, the budget will still be balanced by 2012, according to the CBO, because the expiration of the Bush tax cuts at the end of 2010 would bring in so much new revenue that the budget would go from red to black.
Of course, Bush means to balance the budget and keep his tax cuts. And he just might get his way if by 2010 the budget deficit is less than $100 billion. "I think most or all of the Bush tax cuts will be extended because the deficit will be so low that they won't have an excuse to let them expire," says Chris Edwards, a budget expert at the libertarian Cato Institute. "The next president is really going to luck out." Until No. 44 tries to fix healthcare and Social Security, that is.
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