Concord Coalition Warns Against Fiscal Euphoria

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WASHINGTON With today’s release of the Bush
Administration’s Mid-Session Review projecting a decline in the federal budget
deficit, from $412 billion last year to $333 billion this year, The Concord
Coalition warned lawmakers not to use this welcome news as an excuse to enact
new tax cuts or spending initiatives. The revenue boost fueling the improvement
may be the result of temporary factors and, in any event, leaves us with a debt



WASHINGTON With today’s release of the Bush
Administration’s Mid-Session Review projecting a decline in the federal budget
deficit, from $412 billion last year to $333 billion this year, The Concord
Coalition warned lawmakers not to use this welcome news as an excuse to enact
new tax cuts or spending initiatives. The revenue boost fueling the improvement
may be the result of temporary factors and, in any event, leaves us with a debt
that is still growing faster than the economy an
ominous prospect with the huge fiscal challenges of the baby boomer retirement
years beginning in just three years. Nothing about these numbers suggests a
fundamental improvement in the mid- or long-term fiscal outlook.

“Politicians should keep the fiscal champagne bottles corked. The real news here
is that even with a strong economy and an unexpected revenue jump we still have
a deficit in excess of $300 billion (2.7 percent of GDP) and interest on the
debt has become the fastest growing category of federal spending. Moreover, the
deficit for next year is projected to go up. If lawmakers get the idea that our
fiscal challenges are behind us and view these numbers as a green light for new
tax cuts or spending initiatives, they will make a bad situation worse,” said
Robert L. Bixby, executive director of The Concord Coalition.

The Concord Coalition urged lawmakers and the public to keep
today’s news numbers in perspective by considering the following:

  • The Administration’s projection of much lower deficits after
    2006 assumes no further relief from the alternative minimum tax and only $50
    billion of additional funding for the wars in Iraq and Afghanistan. Adjusting
    for more realistic assumptions in this regard leaves annual deficits of
    roughly $300 billion throughout the 5-year window, under the Administration’s
    policies.

  • The main fiscal consequences of the Administration’s major
    initiatives tax cut extensions and Social
    Security personal accounts occur beyond the
    5-year budget window. Limiting consideration of current policies to the next
    five years thus gives a myopic and misleading view of the fiscal outlook.

  • Even assuming that the deficits fall by as much as the
    Administration projects beyond 2006, interest on the debt by 2010 will have
    increased 76 percent over this year’s level. This also assumes that interest
    rates will remain at unusually low levels.

  • Although the Administration now assumes a higher baseline for
    revenues (by about $80 billion per year) the surprising bump in revenues this
    year primarily from corporate taxes and
    nonwithheld personal income taxes may well be
    attributable to temporary factors associated with last year’s stock market
    performance, expiration of the depreciation bonus and a one-time incentive to
    repatriate offshore earnings.

  • The numbers do not support the proposition that tax cuts
    result in higher revenues. In the Administration’s April 2001 budget, the
    baseline revenue projection for 2005 was $2.57 trillion. Following four rounds
    of tax cuts, the Administration is now projecting revenues for 2005 of $2.14
    trillion.

  • Revenues in 2000 totaled $2 trillion. They fell for three
    straight years and only this year will they get back over $2 trillion.
    Adjusted for inflation, revenues are still below the 2000 level. As a
    percentage of GDP, revenues fell from 20.9 percent of GDP to 16.3 percent in
    2003 the lowest such number since 1959
    before rising to 17.4 this year. Meanwhile, spending has risen from
    18.4 percent of GDP in 2000 to 20.1 percent under the Administration’s
    policies.

  • Strong economic growth has not been enough to close the gap
    that has opened up between spending and revenues
    nor is it likely to do so in the future. Even with continued strong growth,
    higher revenue projections and tight spending restraint assumed in the
    President’s Mid-Session Review, revenues never rise above 18.1 percent of GDP
    and spending never falls below 19 percent of GDP. This short-term structural
    deficit makes it all the more difficult to prepare for the larger challenge of
    the long-term fiscal gap.


 

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CONTACT:


Tristan Cohen
(703) 894-6222



[email protected]

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