"Politics is the art of the possible."
"Politics is not an exact science."
Otto Van Bismarck (1815-1898)
If you took the predictions of endless surpluses near the peak of a financial bubble with a grain of salt then you should have no problem taking the predictions of endless deficits coming out of a recession and a major war with a similar grain of salt.
The President's FY 2005 Budget in Perspective: Part I
President Bush released his fiscal year 2005 budget yesterday, which requests nearly $2.4 trillion in total outlays and anticipates $2.036 trillion in total revenues. One of the big stories to emerge since the budget was released has nothing to do with the FY 2005 budget. Instead, many reports have focused on the administration’s estimate that the FY 2004 budget deficit will top $520 billion.
What Caused This Year’s $520 Billion Deficit?
Media outlets such as the Washington Post have decried the estimated $520 billion deficit for FY 2004 as a product of the tax cuts enacted in 2001 and 2003. Table 1, below, shows that they are at most 30 percent responsible.
Spending is Driving the Deficit
<font color=blue>
Share of
Change Change Deficit
2001 2004 ($) (%) Swing
REVENUES $1,991.2 $1,798.1 -$ 193.1 - 9.7% 29.8%
OUTLAYS 1,863.8 2,318.8 $ 455.0 24.4% 70.2%
DEFICIT/
SURPLUS $ 127.4 -$ 520.7 -$ 648.1 NA NA
</font>
The table shows that since Bill Clinton’s last fiscal year in office, FY 2001, the government has gone from a surplus of $127.4 billion, to a deficit of $520.7 billion—a swing of $648.1 billion in three fiscal years. In those three years, revenues have declined slightly less than 10 percent while total federal spending has climbed by 24.4 percent. Thus, spending increases account for 70 percent of the swing in the government’s bottom line, while the drop in tax revenues account for less than 30 percent.
The last three-year period when Washington increased spending this much was FY 1989–1991.
The decline in tax revenues is not entirely due to the Bush tax cuts but to continuing economic factors. For example, while overall individual income tax collections are down $229 billion compared to FY 2001 levels, almost 25 percent of this is due to the collapse of capital gains collections after the stock market bubble burst in 2000. In FY 2004, the capital gains collections are expected to total $44 billion. This is $56 billion below the $100 billion collected in FY 2001, and a remarkable $75 billion below FY 2000 when the government collected a record $119 billion in capital gains revenue. The decline in individual income tax collections is being offset by an increase in corporate income taxes. The administration expects to collect $168 billion in corporate income taxes this year, nearly $18 billion more than was collected in FY 2001.
We should, however, be cautious about staking too much on the current deficit forecasts because they are likely to be proven wrong. A recent study by economists at the International Monetary Fund (IMF) looked at the forecasts made by the Office of Management and Budget and the Congressional Budget Office in FY 2002, FY 2003, and for the FY 2004–2008 period. <font color=red>It found that legislated tax changes accounted for an average of 22 percent of the revisions made by these agencies, while "economic and technical reestimates" accounted for between half and two-thirds of the revisions made for those years. "Economic and technical reestimates" is a fancy term for errors in the models in which the estimates are made. The press and public should take any of these forecasts with a large grain of salt.
</font>
taxfoundation.org
Part II of this series will focus more specifically on the spending trends contained in the FY 2005 budget and compare these trends with previous administrations |
