WASHINGTON -- With today's budget update by the Congressional Budget Office (CBO) showing the deficit shrinking from $318 billion in 2005 to $260 billion this year, The Concord Coalition warned that the lower deficit -- while certainly welcome -- does not signal a fundamental improvement in the nation's troublesome fiscal outlook or a decision by politicians to tackle the hard choices needed for sustained deficit reduction.
"The deficit may be down but there has been no sudden outbreak of fiscal responsibility in Washington. The lower deficit this year would be more encouraging and meaningful if it resulted from deliberate policy decisions. Unfortunately, that is not the case. The deficit reduction reflected in CBO's new projections is the result of technical and economic re-estimates, things over which Congress has no control. Legislative actions, which Congress does control, have actually increased the deficit," said Robert L. Bixby Executive Director of The Concord Coalition.
According to CBO, the net impact of legislation enacted by Congress this year would increase the deficit by $132 billion over the next five years. The modest savings from the Deficit Reduction Act were swamped by the impact that tax cuts, additional spending for military operations and other increases had on the deficit.
"Contrary to the claims of tax cut advocates, the recent increase in revenues does not validate the claim that tax cuts pay for themselves. This argument ignores the unprecedented three-year decline in revenues from 2001 through 2003 that preceded the recent revenue increases. Most of the recent increase in revenues is the result of a rebound from their lowest levels as a percentage of the economy since the 1950's," said Concord Coalition Policy Director Ed Lorenzen.
"Although many factors contribute to the growth in revenues, the evidence suggests that the recent increase in revenues is as much a product of technical factors such as changes in income distribution as from stronger economic growth. In fact, a dynamic analysis recently released by the Treasury Department suggested that the economic feedback from extending the 2001 and 2003 tax cuts would offset less than ten percent of the static revenue loss, and would only do so if the tax cuts were offset by spending cuts," Lorenzen said.
On the surface, CBO's report shows an improving budget outlook over the next decade even as the baby boom generation begins to retire. This deceptively benign outlook is not because spending on health care and retirement programs is held in check. To the contrary, between 2007 and 2016 the cost of Social Security, Medicare, and Medicaid will increase from 8.8 to 11 percent of GDP. The reason for the baseline improvement is that it assumes policymakers will hold discretionary programs, including defense, to just 2.7 percent growth annually -- as opposed to 8 percent last year and a 5.2 percent annual average rate from 1994 through 2004 -- and that they will not enact new legislation to extend any expiring tax cuts or provide relief from the Alternative Minimum Tax (AMT) and that they will allow scheduled cuts in Medicare payments to doctors that have been blocked three years in a row to take effect.
The Concord Coalition released an alternative baseline scenario using plausible policy assumptions based on recent trends and legislative proposals. It shows a very different picture than the official baseline. Assuming that: 1) appropriations rise at the same rate as economic growth (GDP), not inflation, 2) funding for operations in Iraq and Afghanistan slow gradually from 2006; 3) Congress continues to prevent scheduled cuts in Medicare payments to doctors from taking effect, 4) relief from the AMT is extended, and 5) all expiring tax provisions (including the 2001 and 2003 tax cuts) are made permanent CBO's 10-year baseline deficit grows from $1.76 trillion to $5.16 trillion.
"The most important point to take from this report is that current fiscal policy remains unsustainable under realistic assumptions. Congress and the President should heed the clear warning signs in CBO's report; specifically that while much of this year's revenue surge may prove to be temporary, spending pressures are certain to ratchet up substantially by the end of the decade as the baby boomers begin to retire," Bixby said.