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.