Concord Coalition Warns Against Fiscal Euphoria

Press Release
Tuesday, July 11, 2006

WASHINGTON -- With the Bush Administration's Mid-Session Review today projecting that very strong revenue growth will cause a slight decline in the federal budget deficit--from $318 billion last year to $296 billion this year--and also projecting that the deficit will be cut in half by 2008, a year earlier than the President's goal, The Concord Coalition warned that nothing about these numbers suggests a fundamental improvement in the mid- or long-term fiscal outlook. 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 beginning in just three years.

“Politicians should keep the fiscal champagne bottles corked. The real news here is that even into our fifth year of economic recovery and with two years of very strong revenue growth, we will still have a deficit this year of almost $300 billion (2.3 percent of GDP). Interest on the debt has become the fastest growing category of federal spending. Moreover, the deficit for next year is projected to go up and the Administration's projections beyond 2007 do not include the likely costs of important policies such as the war in Iraq and Alternative Minimum Tax (AMT) relief. If lawmakers get the idea that our fiscal challenges are behind us they will make a bad situation worse,” said Robert L. Bixby, Executive Director of The Concord Coalition.

“Even if the deficit is cut in half by 2008, this goal is a significant retreat from the bipartisan balanced budget goal that existed only a few years ago. The halfway goal trivializes the full magnitude of the fiscal challenges ahead and does little to prepare the nation for the kind of hard choices that will eventually be required to bring about a sustainable fiscal policy. Focusing undue attention on cutting the deficit in half, whether in 2008 or 2009, diverts attention from the much more daunting long-term fiscal challenges,” Bixby said.

The Concord Coalition also urged lawmakers and the public to keep today's new numbers--particularly the revenue growth--in perspective. Adjusted for inflation, revenues are just now reaching their level of five years ago. As a percentage of GDP, revenues fell from 20.9 percent in 2000 to 16.3 percent in 2003-- the lowest such number since 1959-- before rebounding this year to the administration's projected level of 18.3 percent. Meanwhile, spending has risen from 18.4 percent of GDP in 2000 to 20.6 percent under the Administration's policies.

"Before supply-side advocates give credit to the tax cuts for the increase in revenues over the last two years they first must acknowledge that tax cuts bear some responsibility for the extraordinary three-year decline in revenues from 2001 through 2003," said Concord Coalition Policy Director Ed Lorenzen. "Much of the recent increase in revenues is a result of revenues simply rebounding from the lowest levels as a percentage of the economy since the 1950's," Lorenzen said.

Concord cautioned against drawing an inevitable connection between tax cuts, economic growth and higher revenues. For example:

  • In the five years following the tax increases of 1993, annual real economic growth averaged 3.8 percent. In the five years since the tax cut policies began in 2001, annual real economic growth has averaged 3.1 percent.

  • In the five years after the tax increases of 1993, annual revenue growth averaged 8.3 percent. In the five years after the tax cut policies began in 2001, annual revenue growth has averaged 4 percent.

“These numbers certainly do not establish that tax increases are better for the economy than tax cuts, but they do establish that the tax cuts enacted over the past few years are not necessarily needed beyond their expiration date to ensure economic growth. The best fiscal policy is one that balances spending and revenues at a sustainable level over the long-term,” Bixby said.

The deficit path outlined in the Mid-Session Review shows the deficit declining from $339 billion in FY 2007 to $157 billion in FY 2009. This follows a pattern of prior Bush Administration estimates, which have usually assumed substantial improvements between the first and third years. The fate of these past projections demonstrates the difficulty of turning optimistic assumptions into reality:

  • The FY 2003 budget projected an $80 billion deficit in FY 2003 and a $61 billion surplus by FY 2005. In reality, FY 2005 ended with a $318 billion deficit.

  • The FY 2004 budget projected a deficit of $307 billion declining to $201 billion by FY 2006. In reality, the FY 2006 deficit is now projected to be roughly $100 billion higher.

  • The FY 2005 budget projected the deficit would decline from $364 billion to $241 billion in FY 2007. The FY 2007 deficit is now estimated to be $339 billion.

Rapid changes in the deficit can occur, but rarely does a sharp decline occur as a direct result of policy initiatives (i.e., spending cuts or tax increases). This year's budget is no exception. The dramatic drop in the deficit projection between 2007 and 2009 -- from $339 billion to $157 billion -- is primarily due to the omission of items that would make the bottom line look worse, not because of explicit policy choices. Specifically, the deficit projection for 2009 assumes a revenue windfall from the AMT when the current “fix” expires, and the budget does not include any new funding for military activities in Iraq and Afghanistan beyond 2008.



CONTACT: Tristan Cohen (703) 894-6222 [email protected]