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Thursday, July 07, 2005

Swinging With The Federal Deficit

The Congressional Budget Office released its Monthly Budget Review on Thursday. As expected based on data from the Treasury, the estimates suggest a likely reduction -- to somewhere between $325-350 billion -- from the CBO's forecast for the year. There will be lots of talk in the media about whether these estimates mean that the Bush tax cuts "worked" -- and you can count on lots of creduluous reporting of silly Laffer curve claims by "snake-oil salesmen". Here are some thoughts about all this, in no particular order:
  1. It's certainly good news that revenues are up, and the expected deficit will likely fall.
  2. By all accounts, the improvement is a short-term phenomenon (even though I hope it's not).
  3. The Bush Administration's initial deficit forecast of $427 billion was widely believed to be deliberately inflated in order to make any reductions look bigger (compared to CBO's $400 billion).
  4. We still have a structural budget deficit, which is to say that current revenue policies for the future aren't sufficient to pay for current spending policies for the future.
  5. Republicans want to increase that structural deficit by making the 2001 and 2003 tax cuts permanent.
  6. That structural deficit looks smaller than it is, because there is a broad consensus that the Alternative Minimum Tax needs to be repealed or otherwise fixed. The CBPP estimates that together with making the 2001 and 2003 cuts permanent, AMT repeal would add almost $1.2 trillion dollars to the federal debt over the next decade.
These are the central facts people should pay attention to, not year-to-year swings in budget deficits.


Blogger strategery4 said...

While I agree with you in general about the snake oil problem -- even if the tax cuts generate slightly higher growth they ain't gonna pay for themselves by a long shot -- I don't think point #3 is precisely correct. Last year, the Admin's initial deficit projection (something like $521 billion) was widely believed to have been deliberately inflated to make it easier to claim that they would meet their campaign pledge to cut the deficit in half by 2009. (Which, as I recall, is nothing to brag about and could be done by gov't on autopilot. And even then they coudn't decide whether half meant half in dollars terms or half as large a share of GDP. But I digress.) I don't recall accusations that this year's estimate was inflated -- and doing so would have less clear political benefits and to some extent would undercut their own "look what we've done already" story.

On the AMT, rumor has it that this is considered a blue state problem (high income, two-earner families in states with high housing values and thus high property taxes), so while the Repubs may pay lip service to solving it a substantial fix might require some serious concessions by the dems.

7/07/2005 10:41 PM  

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