Bush's Bogus Budget

[Rspaight]

Another Bogus Budget
By PAUL KRUGMAN

Published: February 3, 2004

Well, whaddya know. Even as the Republican leadership strong-armed the Medicare drug bill through Congress, the administration was sitting on estimates showing that the plan would cost at least $134 billion more than it let on. But let's not make too much of the incident. After all, it's not as if our leaders make a habit of faking their budget projections. Oh, wait.

The budget released yesterday, which projects a $521 billion deficit for fiscal 2004, is no more credible than its predecessors. When the administration promises much lower deficits in future years, remember this: two years ago it projected a fiscal 2004 deficit of only $14 billion. What's new this time is that the administration has decided to pay lip service to conservative complaints about runaway spending.

Over the past few months, many pundits have obediently placed the onus for rising deficits on "a vast increase in discretionary domestic spending," or words to that effect. By the way, the Heritage Foundation, which has orchestrated this campaign, is cagier than those pundits; it covers itself by relying on innuendo, never saying outright that domestic discretionary spending is the source of the deficit.

To mollify these critics, the new budget purports to shrink real domestic discretionary spending. This won't happen; even if it did, it would have a negligible impact on the deficit. But it isn't just a fake solution — it's a response to a fake problem.

The prime cause of giant budget deficits is a plunge in the federal government's tax take, which fell from 20.9 percent of G.D.P. in fiscal 2000 to a projected 15.7 percent this year, the lowest share since 1950. About 45 percent of this plunge can be attributed to the Bush tax cuts. The rest reflects the end of the stock market bubble, the still-depressed economy and — probably — growing tax sheltering and evasion.

It's true that increased spending also contributes to the deficit, and that there has been a substantial increase in discretionary spending — spending that, unlike such items as Social Security payments, isn't automatically determined by formulas. But the bulk of this increase has been related to national security.

Traditional budget measures distinguish between defense and nondefense discretionary spending. Even by these measures, defense accounts for most of the increase in recent years. But a better measure would group homeland security and other costs associated with 9/11 with defense, not domestic programs. The Center for American Progress — confirming related work by the Center on Budget and Policy Priorities — estimates that from 2000 to 2004 security-related discretionary spending rose to 4.7 percent of G.D.P. from 3.4 percent, while nonsecurity spending rose to only 3.4 percent from 3.1 percent.

In other words, the role of nonsecurity spending in the plunge into deficit is trivial, compared with tax cuts and security spending. (Credit where credit is due: the administration's budget numbers show the same thing.) And even severe austerity on nonsecurity spending won't make a significant dent in the deficit.

So what will it take to get the budget deficit under control? Unless Social Security and Medicare are drastically cut — which is, of course, what the right wants — any solution has to include a major increase in revenue.

Many Democrats have called for a partial rollback of the Bush tax cuts, preserving the "middle class" cuts — those that convey at least some benefit to the 77 percent of taxpayers in the 15 percent tax bracket or below. Such a partial rollback would have reduced this year's budget deficit by about $180 billion; that would help, but one hopes politicians realize that it's not enough.

Another major source of revenue could be a crackdown on tax loopholes and tax evasion, which has reached epidemic proportions. In particular, what's going on with the tax on corporate profits? That source of revenue is down, as a percent of G.D.P., to 1930's levels. No, that's not a misprint. And receipts are not growing nearly as fast as one would expect, given an economic recovery that has bypassed workers but given big gains to their employers. An administration that actually tried to make corporations pay their taxes might be able to find $100 billion or more each year.

An eventual budget solution will involve all this, and more. But the first step is to stop looking for villains in all the wrong places.

[Rspaight]

Team Bush's Wishful Budget Thinking
By Kevin Harris

A close look at the White House's fiscal 2005 version finds plenty of grossly unrealistic revenue and spending projections

Like cold weather and the Super Bowl, White House budget proposals are an annual January rite. Throw in a Presidential election year, and you get more than the usual blend of politics and questionable economic projections in the budget's fiscal 2005 edition, released on Feb. 2.

First, let's look at the political side of this fiscal blueprint. President George W. Bush has now presided over the biggest gusher of red ink in the nation's history, from a surplus of $127 billion when he entered office for fiscal 2001 to a 2004 deficit projection of $521 billion (in nominal terms, that's the sharpest plunge into deficit-spending ever, although not as a percentage of gross domestic product).

SECURITY FOCUS. Since Bush must face the voters in November, he has to provide a plan that at least purports to begin reining in the budget shortfall. So he has pledged to limit spending growth to around 4% annually to help reduce the deficit by half over five years, according to White House projections.

For fiscal 2005, Bush calls for limiting federal spending growth to 3.5% -- slower than the 4.4% projected growth in output. He proposes to accomplish this in part by terminating 65 federal programs and reducing an additional 63. At the same time, however, Bush is asking that tax cuts put in place temporarily earlier in his Presidency be made permanent, which would create huge fiscal headaches in the latter part of this decade and beyond.

Bush also wants to maintain his Administration's focus on national security, which shows up in a rising share of outlays for the military. Note, however, that incremental spending for Iraq and Afghanistan are not included in the budget, so that the overall amount spent on military outlays may fall in 2005. (see BW Online, 9/10/03, "The Neatest Thing about That $87 Billion").

ROSE-COLORED CALCULATIONS. The legerdemain continues with other provisions of the budget. The 128 programs slated for elimination or cutbacks all enjoy some degree of political support among congressional Republicans. At the same time, the tax cuts' extension seems a low-percentage outcome in the face of relentless deficits. If House Democrats and a few fiscal conservatives among Republicans resist, as seems likely, those extensions won't pass.

Without knowing how many of the targeted spending programs will be closed or reduced, it's impossible to predict what the net budgetary impact will be. Note that the 3% to 5% pace of spending growth Bush forecasts for the next six years has been matched for an extended period only once in the past 20 years -- in the 1992-99 period.

Tack on a few "cost"-saving details, like the budget's assumption of a lower jobless rate (5.6% for 2004, vs. 5.7% in the latest survey of forecasters compiled by Bloomberg), a slower pace of inflation (consumer price index up 1.4% in 2004, vs. 1.8% in the Bloomberg survey) and lower bond yields (an average yield of 4.76% on the 10-year Treasury note vs. Bloomberg's median of 4.76%), and the spending projections look a quite rosy.

NO AMT REFORM. Bush's revenue projections are at least as optimistic as those for spending. The White House expects revenue gains of 13.3% in 2005, a pace not matched even in 2000, when the capital-gains tax windfall reached its zenith. Thereafter, Team Bush projects a steady slowing in revenue growth. But the projected 8.3% gain in 2006 is still well above average -- and over twice the forecasted pace of GDP growth.

This projected 22% revenue rise in revenues in two years tops anything seen during the stock-bubble period. We at Informa Global Markets think it's quite unrealistic.

The Bush budget also whistles past the graveyard on one other knotty subject. There's no effort to reform the alternative minimum tax in 2005, something nearly everyone thinks should be done but which is likely to prove devilishly expensive. Blue smoke and mirrors, anyone?

[Patrick M]

CBO: Bigger Long-Run Deficit in Bush Plan

Fri Feb 27, 6:41 PM ET

By Anna Willard

WASHINGTON (Reuters) - President Bush's budget plans would improve the fiscal deficit in the next few years but send the shortfall soaring over the longer run, congressional analysts said on Friday.

Democrats and even some in Bush's own Republican Party have criticized him for the growing deficits, which have become a thorny political issue for him before the Nov. 2 election. Bush inherited a budget surplus when he took office in January 2001.

In a review of the president's budget, the nonpartisan Congressional Budget Office said Bush's policies would lead to a deficit of $356 billion in 2005, slightly better than the $363 billion deficit the CBO is forecasting without taking the president's budget proposals into account.

From 2005 until 2014, the cumulative total of the deficit would balloon to $2.75 trillion, far worse than the $2.01 trillion the CBO is looking for under existing policies.

The report came just two days after Federal Reserve Chairman Alan Greenspan warned Congress a major budget crunch loomed as tens of millions of baby boomers, born after World War II, begin to qualify for early retirement benefits.

Earlier this month, Bush proposed a $2.4 trillion election-year budget that would boost defense spending by about 7 percent, slash 128 programs and seek to cut this year's record deficit in half.

Tax cuts and spending on defense paired with a sluggish economy have helped create a record budget deficit the White House estimates will hit $521 billion this year.

The CBO is slightly more optimistic, expecting a deficit of $477 billion this year, the same projection the budget forecaster made in January.

The 10-year outlook is likely to garner the most interest among Bush's political opponents as they look to pin blame on him for what they say are poor economic policies.

The White House, which put out a five-year budget plan, said long-term outlooks could be unreliable.

"The further you go out, the more likely there are to be inaccuracies. They don't even do error estimates for 10-year figures," said Chad Kolton, spokesman for the White House Office of Management and Budget.

Democrats say the cost of Bush's tax cuts will eat into future funding for Social Security and other social safety nets.

Republican fiscal conservatives are also calling for spending restraint.

The CBO is forecasting deficits for every year through 2014, the last year it looks at in this report.

The congressional analysts also estimated the cost of making Bush's tax cuts permanent to be about $1.3 trillion over the next 10 years.

Bush told Congress on Thursday he would settle for making permanent only those of his tax cuts set to expire next year, after fellow Republicans warned the rest might have to wait until after the election. (Additional reporting by Caren Bohan)