How can this be? President Bush has pushed through several rounds of tax cuts and he's spending boat loads of baksheesh on the Iraq war. Republicans and Democrats alike tell us federal spending is out of control, and the media focus largely on the economy's negatives: housing and gasoline prices. Yet there Bush was this week submitting a budget with deficits that go down until there is, voila, a budget surplus?
How is this happening?
Heck, is it even happening? After all, Bush is the only one talking up the fact that the federal deficit is going down, so can it be true?
Well, it is. The deficit went from a projected $521 billion in 2005 to $248 billion in 2006. And the projected deficit for the current fiscal year is $244 billion.
Of course, those numbers are not all that meaningful. Uncle Sam's red ink must always be viewed in relationship to the whole economy. This fiscal year's projected deficit will be 1.9 percent of gross domestic product, and the president's budget for 2008 puts the federal deficit at 1.6 percent of GDP.
How do those deficit-as-a-percentage-of-GDP figures stack up? Well, when Bush promised in his 2005 State of the Union address to cut the deficit in half by 2009, the projected deficit of $521 billion totaled 4.5 percent of GDP. The 1992 deficit was 4.7 percent of GDP. The recession-racked 1983 deficit came in at 6 percent of GDP.
But anyone can cherry-pick a few years to pretty up an administration's red ink, right? Right. Year-to-year comparisons can provide context, but they can just as easily facilitate spin. Averages can provide a truer picture, and here's what Rob Portman, director of the Office of Management and Budget, pointed out last week: "This deficit is below the 40-year historical average of 2.4 percent of GDP and is smaller than the deficit as a percent of GDP in 18 of the previous 25 years."
So the federal deficit is going down in both nominal terms and as a share of the U.S. economy. What gives? Have Bush and Congress cracked down on runaway spending? A bit, yes. Yet here's what really gives—or continues to give the federal government more money: the U.S. economy.
It's going gangbusters. Last quarter the economy revved on with a 3.5 percent growth rate, and last year it expanded by 3.4 percent. That's an increase from its 3.1 percent growth the previous year.
We've had 42 consecutive months of consecutive economic growth, as well as 13 percent GDP growth and the creation of 7.3 million jobs since the second round of Bush tax cuts in 2003.
A booming economy and bull markets, low inflation, impressive job- and hourly-wage growth; it is, National Review Online's Larry Kudlow has written, "the greatest story never told."
The result: Tax collections are pouring into the U.S. Treasury. Last year revenues jumped by 11.8 percent. The year before they went up by 14.5 percent. The 2008 budget that Bush released last week estimated revenue growth at 5.5 percent this coming year.
A rosy scenario? Maybe, though it's worth noting that the administration predicted tax revenue would grow by 5.5 percent in this fiscal year's first quarter. The actual first collections came in at 8.2 percent.
Of course, the president's new budget projects continued declining deficits and even a budget surplus by 2012—while simultaneously making the Bush tax cuts permanent.
That all sounds terrific. But five-year-out budget predictions are for economists and budgeteers. The rest of us live in the real world. Budgeting one or two years out is dicey enough. Bush couldn't have predicted, say, 9/11 and the ruin it visited on the U.S. economy or the fiscal toll the war on terror would take on federal and state budgets. Neither can a president or congressional budget-writers predict what economic or security challenges we'll face a few short years from now. In short, nobody should hold their breath waiting for a surplus in 2012.
That said, the burden of proof is on those who oppose making the Bush tax cuts permanent. It's hard to argue with economic and fiscal success, however unhailed it may be. The last thing a humming economy in the here and now needs is a huge tax hike.
