October 8, 2006

The Federal Budget Deficit: Bush Benchmark Achieved, Ignored

….. and the best may be yet to come.
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A huge point has been virtually if not totally ignored since the announcement on Friday that the reported federal deficit for the fiscal year that ended a week ago was $250 billionThe Bush Administration has done what it said it would do about the deficit three years ago, and has done it a full three years early, i.e., in half the time predicted.

This continues what has been a very difficult past few years for those who deride supply-side economics. If Washington, with a little help from the states, lets the supply-side engine continue to chug along for next several years, the results could be so positively stunning that it would become impossible for supply-side detractors in touch with any part of the real world to hang on to the comfort of their static-analysis fantasyland.

But first, let’s recap what has happened in the past three fiscal years:

  • Tax receipts have soared by over 35% (with 5.5%, 14.5%, and 11.7% increases in fiscal 2004, 2005, and 2006, respectively) from $1.78 trillion to $2.41 trillion (2004 and 2005 results can be found at Page 2 of this PDF from the Congressional Budget Office [CBO]; 2006′s receipts were estimated by adding the $253 billion revenue increase reported near the end of this longer story).
  • Despite the costs of the Iraq War, the rest of the War on Terror, Katrina relief, and not nearly enough control over other spending, the administration has accomplished its goal of cutting the reported deficit in half by the time it leaves office a full three years early (fiscal 2009, which ends a little less than three years from now, is the last budget over which the Bush Administration will have responsibility). Andrew Taylor of the Associated Press reported on the deficit yesterday (commented on here) but “somehow” missed this little nugget of good news, even though he reported on the administration’s original fiscal 2004 promise in a “not going to happen” manner just under a year ago on October 14, 2005 (last two paragraphs at link) –

    The White House has set a goal of cutting the deficit in half from the $521 billion prediction for 2004 that it issued at the beginning of that year. (the original goal was therefore set sometime before October 1, 2003, the beginning of the 2004 fiscal year — Ed.)

    The administration says it is still on track to reach that $260 billion goal by the time Bush leaves office. But administration budget projections leave out the long-term costs of occupying Iraq and Afghanistan, and have yet to be updated with cost estimates of hurricane relief.

    Even with all of those costs included, the administration has reached its goal. How ’bout that, Andrew?

  • Economic growth has averaged an annualized 3.89% during the past 13 quarters since the 2003 Bush tax cuts were passed. This is a record that for all practical purposes matches the best seven years of the Clinton administration, but trails the best seven years of the Reagan-Bush 41 and Kennedy Johnson eras, when more aggressive tax cuts were enacted:
    13QgdpGrowth
(Bottom time period actually ends at 2Q06 — Ed.)

This is all very nice. But it could get better — much, much better. So much better that it’s scary to even contemplate the possibilities, because if the ruling class in Washington thinks it might really happen, they’ll probably figure out how to ruin it.

For starters, understand that I have been using the term “reported federal deficit” for a reason. The TRUE federal deficit is much higher. That’s because for decades federal budgetmakers have reduced the true deficit by the amount by which Social Security tax collections have exceeded Social Security benefits, and have “borrowed” that money from the Social Security “Trust Fund” — even though the “Trust Fund” should be holding and investing those funds to help cover future benefit payments.

Here, pending what I assume will be very minor revisions, is how fiscal 2006 really turned out, in billions; the $179 billion listed as “Social Security surplus” actually consists of a $177 billion Social Security surplus and $2 billion in positive cash flow from the US Post Office; both were estimated by the Congressional Budget Office (CBO) in its August 17 Budget Update Report (large PDF document; information is at Page 12):

FY2006deficit

All of this is important to understanding the following tantalizing possibilities:

  • If federal tax receipts continue to increase at just 9% per year, which is only about 70% of the 13.1% average annual increase in the past two fiscal years, and if federal spending and the Social Security surpluses in future years turn out as the CBO predicts in the Budget Report noted above, the last Bush budget in fiscal 2009 will show a reported surplus.
  • If federal tax receipts continue to increase at 9% per year, and if federal spending and the Social Security surpluses continue to turn out as the CBO predicts, it will be fiscal nirvana — a honest-to-goodness REAL budget surplus will occur in fiscal 2011, less than five years from now.

Here’s is how it will look if the described assumptions hold up:

DeficitThruFY2011proj

So, will these hoped-for serendipitous events take place? Well, there are certainly a lot of barriers. Here are what I believe to be the biggest four:

  1. The CBO is assuming increases in projected outlays of just over 5% per year; unfortunately, the average increase during the past 5 years has been just under 7%. It’s not like 5% can’t be done; the average increase in outlays during the first five years of GOP control of Congress (1995-1999) was only 3.8%. The question is whether there is anything even resembling resolve in Congress to keep spending under control.
  2. The 9% revenue increases, though less than those of the past couple of fiscal years, still depend on two things that haven’t yet happened. First, the tax structure enacted with the Bush tax cuts of 2003 only extends out to 2010. There is absolutely no chance that the hoped-for revenue increases will materialize unless that tax structure is made permanent, or at least extended by a minimum of five more years. Make no mistake: The economy and the markets will treat a failure in this area for what it would really be — a massive growth-stalling tax increase that would drastically reduce the rate of growth in tax receipts, possibly below zero.
  3. The other thing that mostly hasn’t happened yet is fiscal control in the various states. Most of them, thanks to the very federal tax cuts that some governors and so many Blue Staters deride, are awash in revenue. Unfortunately, as has so frequently occurred in the past, most states are simply spending the extra money instead of taking the opportunity to enact their own economy-stimulating tax cuts. The states need to do their part to keep the economic engine running. Ohio (of all states) actually came through on this front with an income-tax reduction a few months ago, but needs to do much more.
  4. Most ideally, the top federal rate should come down further from its current 35%. In 1986, when the first wave of Reagan tax cuts started losing steam, it took another cut of the top federal rate to 28% to get the annual pecentage increase in collections back into double digits again. It’s likely that a cut in the top federal rate to that same 28% level would accomplish an identical result; it would certainly make the 9% revenue-increase assumption more likely to come true, and it could even lead to a level of economic growth closer to that achieved during the Reagan-Bush 41 and Kennedy-Johnson years.

As has been shown time and time again, suppy-side tax cuts work when they are allowed to do their magic.

Let’s keep the magic going, shall we?

Cross-posted at NewsBusters.org.

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UPDATE: From Pajamas Media, very funny — “Deficit Cut in Half. Three Years Ahead of Schedule. Deficit Not Gay. Nobody Notices.”

UPDATE 2: Welcome Instapundit readers! After the problems a couple of months ago, it’s nice to be set up to handle an Instalanche. Glenn notices that writing on the deficit doesn’t even involve virtual gay sex, which must explain the 527 Media’s lack of interest in this news in this post.

UPDATE 3, Oct. 12: The absolute final number reported by Treasury on Oct. 11 ended up being $247.7 billion.

UPDATE 4, Oct. 15: Welcome to Carnival of Insanities readers. A few days ago, this post got noticed by another Post — The New York Post.

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25 Comments

  1. That is why we have to try much harder to spread Foleygate to cover up everything else, such as Iraq, and the economy, until may be after Nov. 2008.

    Comment by ic — October 8, 2006 @ 4:55 pm

  2. I like this list of amazing things Bush has done, but I don’t see on here where he invented electricity and proved unicorns are real. Sadly incomplete.

    Comment by The Mousekeeters — October 8, 2006 @ 5:10 pm

  3. And why hasn’t there been any mention of when W raised a baby from the dead with only the power of his electroshockovisionTM? Damned liberal media!

    Comment by Auguste — October 8, 2006 @ 5:17 pm

  4. Half the time to cut the deficit in half…

    Bizzyblog » The Federal Budget Deficit: Bush Benchmark Achieved, Ignored

    I am staying pretty ignorant of specific policies. I just don’t have the time to catch up, stay abreast of everything to where I can say something that is not just a regurgi…

    Trackback by Hundie Jo dot com — October 8, 2006 @ 5:55 pm

  5. [...] Tom Blumer has the details on a benchmark Bush has achieved, that the MSM has conveniently ignored. By: Sister Toldjah

    Pingback by Sister Toldjah » Federal budget deficit: Bush delivers on a promise - ahead of schedule — October 8, 2006 @ 7:43 pm

  6. #1, #2 and #3, really impressive arguments (/sarcasm). Amazing how you volunteered to display your ignorance.

    Comment by TBlumer — October 8, 2006 @ 8:58 pm

  7. Federal Deficit Cut In Half Three Years Earlier Than Expected…

    Just another reason why Democrats and their allies in the media would like to keep Mark Foley in the headlines as long as possible: A huge point has been virtually if not totally ignored since the announcement on Friday that the reported federal defici…

    Trackback by Say Anything — October 8, 2006 @ 9:13 pm

  8. No surprise it wasnt reported widely. None at all. Good post.

    Comment by Ben Keeler — October 9, 2006 @ 12:38 am

  9. The funny thing is that those comments, 2 and 3, could easily have been made by News Producers at any of the major networks without additional irony, and comment #1 could have been made at the New York Times without any irony whatsoever.

    News is news, whether it casts Bush in a good light, or bad. Choosing what to report is more about thought control than informing a democratic populace.

    Comment by moptop — October 9, 2006 @ 8:37 am

  10. [...] Our economy is the beautiful girl next door that the media keeps on failing to notice. Or perhaps dismissing as too geeky to pay attention to. I like geek girls, though. [...]

    Pingback by The Girl Next Door « Tai-Chi Policy — October 9, 2006 @ 12:23 pm

  11. [...] BizzyBlog reported yesterday that the reported federal deficit has been cut in half since three years ago, when the Bush administration predicted it would halve the deficit in six years. [...]

    Pingback by Necessary Roughness » Blog Archive » Federal Deficit Cut in Half, Three Years Early — October 9, 2006 @ 10:56 pm

  12. What you conveniently ignore is that Clinton *had* the budget balanced. It took Bush to create a crisis, go back to dropping taxes and deficit spending, and it’s going to take 12 years before the annual budget is in the black.

    Imagine the crowing the Repubs could have done if Bush had have just cut spending without going to deficit financing. The US might actually become an economic superpower again.

    Comment by vuarra — October 10, 2006 @ 5:39 am

  13. this is the dopiest economic analysis i’ve seen. Extend your logic a little longer, and pretty soon tax receipts will = GDP. Wow! By the way, if you want a real picture of the deficit, you need to add in the multitude of things the gov’t conveniently excludes, such as the cost of Iraq, making tax cuts permanent, fixing the alt-min tax, – none of which are in your numbers.

    If you keep spinning, eventually you’re going to puke.

    Comment by ptf — October 10, 2006 @ 9:20 am

  14. #12, the economy was heading downhill in a hurry in mid-late 2000 (3Q 2000, 4Q 2000 and 1Q 2001 GDP growth was -0.5%. +2.1%, and -0.5%, respectively). After the tax collections from the bubble-induced stock options played out in 2000, receipts were doomed to go down — and did, falling 1.7% in 2001. Then there was Sept. 11, 2001.

    None of this could conceivably blamed on Bush, whose first budget did not kick in until 10/1/2001, and that fiscal year was greeted with the obvious economic aftermath of 9/11.

    The big Bush mistake, with the help of a Senate that did not get it, was that he did not do the investment-oriented tax cuts of 2003 in 2001. The 2001 cuts were nice, but did not stimulate investment or economic growth, or tax receipts. The cap-gains and dividend cuts should have been in the first budget.

    And I agree that Bush and Congress should have been contolling spending these past years. If spending growth had been just 2% less than the 7% actual, we would be within striking distance of a reported deficit of zero right now.

    Comment by TBlumer — October 10, 2006 @ 12:30 pm

  15. #13, please:
    – supply-side econ says that tax cuts increase tax receipts within a relevant range. Once you get down into the low- to mid-20s with a top marging income-tax rate, you probably will not generate more receipts. With the top rate still at 35%, we are still in the relevant range within which supply-side tax cuts work, as has been shown during the past 3 years, the Reagan admin, and the Kennedy-Johnson era. The history is what it is.
    – This is a Prego spaghetti sauce post. Iraq and the alt min tax are in there. *making the tax cuts permanent* or extending them 5 years is hoped for, because, as noted in my first point, they are necessary to keep a 9% increase in annual tax receipts going for 5 more years.
    - No one is spinning anything. I am just documenting the results (because the 527 Media will not) and projecting them based on what I believe are reasonable assumptions.

    Comment by TBlumer — October 10, 2006 @ 12:38 pm

  16. The Media Playing Stupid…

    From Captain’s Quarters Blog.It’s The Economy, Even If The Media Doesn’t Report It
    Bill Clinton got elected on the James Carville slogan, “It’s the economy, stupid.” Fourteen years later, it’s the media playing stupid,
    as a roaring economy ha…

    Trackback by On the Right — October 11, 2006 @ 9:36 pm

  17. Economics and Social Policy XVII…

    Link to the Carnival of Economics and Social Policy XVII….

    Trackback by The Boring Made Dull — October 15, 2006 @ 3:42 pm

  18. [...] The DOW has past the 12,000 mark setting new all time highs despite the war in Iraq and the North Korean nuclear threat.  Now even more good news is coming out about the US economy: The Labor Department Friday announced that the number of jobs increased between April 2005 and March 2006 not by 5.8 million but by 6.6 million. … The federal budget deficit has been cut in half in three years, three years faster than George W. Bush called for. Why? Tax receipts were up 5.5 percent in FY 2004, 14.5 percent in FY 2005, and 11.7 percent in FY 2006. That’s up 34.9 percent in three years. And that’s after the 2003 tax cuts. [...]

    Pingback by US Economy Surging Despite NK Nuclear Threat « — October 24, 2006 @ 3:30 am

  19. HamNation: Hold Onto Your Collards!…

    So, the Dems are in power and suddenly the dastardly deficit, created solely by Bush’s irresponsible tax cuts for the rich, doesn’t matter anymore.
    Why? Because now Dems get to do the deficit spending! Of course, the real problem was always……

    Trackback by Mary Katharine Ham — January 5, 2007 @ 2:08 pm

  20. I wish you would further amplify your excellent analysis, particularly relative to the remarkable effect that reduction in the capital gains tax has on had on increased (not decreased) tax revenues. For example, the Economic Recovery Tax Act of 1981 reduced the top tax rate from 70% to 28%, but much more importantly, the capital gains tax on investments was reduced to 20% (it had been 49% in 1979). As a result, several hundred $million in venture capital was raised “almost overnight,” ($billions since then),and this jump started new small busines formations from about 250,000 to 800,000 per year. (Every year since 1982, 600,000 to 800,000 new businesses have incorporated, (some 23 million total)creating 40 million net new jobs, most of the in companies with less tan 20 people. This is where most of the tax revenues have been generated. In 1982, tax revenues were about $12 billion but then jumped to $50 billion per year over the next 3 years (instead of disappearing as the media loudly predicted). However in 1996, the capital gains tax was inexplicably raised back up to 31%, and tax revenues collapsed to $25 billion. It wasn’t until about 1993 that this tax was reduced to 20% again, and capital gains tax revenues soared to about $74 billion, and are over $200 billion now, after reduction to 15% in 2003. (I don’t have these latest numbers). Can you do a chart on this remarkable phenomenon? It is this surge in capital gain tax revenues that has been largely responsible for reducing the budget deficit so rapidly, as you have documented.

    Comment by Bruce Merrifield — January 12, 2007 @ 2:35 pm

  21. #20, thank you so much for that additional info. There was a cap gains reduction in 1996 or 1997 that kept the 1990s boom going and heated it up.

    Appreciated or not, it can be fairly said that the Reagan tax cuts funded the Silicon Valley.

    Comment by TBlumer — January 12, 2007 @ 2:51 pm

  22. Let’s be clear. This country is in massive debt! Nearly 9 Trillion dollars. And it’s growing at a rate of 1.5 billion per day. It’s good to see the Federal Budget Deficit moving in the right direction. But I’m pretty sure when Bush took office, he inherited a budget that was in the positive cash flow. Now I don’t have all the figures, clearly I’m not as smart as the owner of this blog. But I’m a person who works and has debt. I never spend more that I need to pay my bills. I pay my bills as quickly as possible to avoid the intrest rates fees which only drive you further into debt. It’s a simple concept, something I taught my children. How is it that this simple truth continues to confound our wonderous leaders. I’d be happy to be a lender to the federal government. I’d rack up lots of interest for doing pretty much nothing and it would be a revenue stream for me for a very long time.

    Comment by Mr Reality — January 23, 2007 @ 12:19 pm

  23. #22, Bush didn’t have a budget he was responsible for until Oct. 1, 2001. By that time the economy had long since tanked and receipts were already heading way down. Then throw in 9/11.

    A visit to the Skeptical Optimist would be in order to put the current debt in some context (don’t have a specific link):
    http://www.optimist123.com/optimist/

    While I generally agree that having a national debt isn’t necessarily a problem, I don’t agree with SkepOp on the long-term problems with Social Security and Medicare, which have the potential to eat us alive a la France and Germany unless we do something.

    Comment by TBlumer — January 23, 2007 @ 1:59 pm

  24. #22, also the point of the post wasn’t that I’m satisfied with the size of the deficits (I’m not, esp with the shell game of including the SocSec surplus, as explained), but that supply-side tax cuts led to BIG increases in tax collections, which cut the deficit in half far earlier than originally predicted. If spending were under better control, even more could have been accomplished.

    Comment by TBlumer — January 23, 2007 @ 2:01 pm

  25. This is a test comment.

    Comment by TBlumer — March 11, 2007 @ 1:46 pm

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