The Disappearing Surplus: A Hard Lesson in Economic Projections
Washington, D.C., January 10, 2002 – Later this month, the Congressional Budget Office (CBO) will release its updated projection of the current fiscal year’s federal budget surplus/deficit. Saddled with the task of precisely predicting something that’s so difficult to foresee, CBO will probably now project a deficit, contrasting sharply with its projection last January that the federal government would run a $313 billion surplus for fiscal year 2002.
This drastic change in the fiscal outlook has sent tails wagging throughout Washington. Senate Majority Leader Tom Daschle stated last week, "But September 11 and the war aren’t the only reasons the surplus is nearly gone. They’re not even the biggest reasons. The biggest reason is the tax cut."
Because the Joint Committee on Taxation estimates that in FY2002, the tax cut will return $38 billion – a little over ten percent of the old surplus estimate – Tax Foundation economists researched CBO and congressional Budget Committee data to determine what exactly caused such a dramatic shift in fiscal forecasts. In order of size, the three major contributors are (1) Economic Revisions, (2) Changes in Spending, and (3) the Tax Cut.
In the pie chart below and in the linked table, we make the optimistic assumption that the new estimate will be $0, that is, a perfect balance. If a deficit is predicted, it can be attributed almost entirely to (1) Economic Changes, because estimates of the spending and tax changes are known with greater certainty.
taxfoundation.org
Where did the surplus go? The slowed economy accounted for 69 percent of it, additional spending by Congress 19 percent, and tax relief 12 percent. Zell is right. His party brethren are dead wrong.
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