This from today's Wall Street Journal.Â More proof that the 2003 tax cuts are having the same positive effects on government revenues achieved by the Kennedy and Reagan tax cuts.Â Hooray for supply-side economics.
Budget Deficit Drops to $296 Billion
Under New White House Estimates
July 11, 2006 12:12 p.m.
WASHINGTON -- Thanks to unexpectedly strong government revenues, this year's federal budget deficit will be smaller than previously forecast, a development the White House believes validates its economic policies.
In its annual midsession review, the Office of Management and Budget Tuesday slashed its estimate for the fiscal 2006 budget deficit to $296 billion, or 2.3% of gross domestic product, a $127 billion decline from its previous projection.
"Today is a good day for the American taxpayer," President George W. Bush said in remarks at the White House. "Tax relief is working, the economy's growing, revenues are up, the deficit's down."
In February, OMB said it expected the current fiscal year's deficit to reach a record $423 billion, or 3.2% of GDP. At the time, it also forecast a deficit of $354 billion, or 2.7% of GDP, in fiscal 2007. That number has been revised to $339 billion, or 2.4% of GDP.
The budget numbers could improve further, even though most economists believe the economy will cool slightly in the months ahead. According to Lou Crandall, chief economist for market research firm Wrightson ICAP, administrations typically undershoot in their midsession review deficit projections for the current year. Those estimates have been too pessimistic in 13 of the past 16 years. Mr. Crandall forecasts the fiscal 2006 deficit falling to between $280 billion and $300 billion, down from last year's $318 billion budget gap.
The anticipated improvement keeps the administration on track to cut the deficit in half -- as a percentage of GDP -- earlier than the 2009 target date. OMB said the goal will be reached in fiscal 2008, when the deficit is expected to drop to $188 billion, or 1.3% of GDP.
But budget watchers and administration critics say the deficit-cutting goal is unambitious because the starting point was the White House's overestimated fiscal 2004 deficit projection. Mr. Crandall urged the White House to set another, bolder target.
"Having cut the budget gap in half already, it would be encouraging to see the administration commit itself to cutting the remaining deficit in half again by 2009," he said in a note to clients. "Unfortunately, there is no indication that the White House sees any advantage in tying its hands in that fashion."
'Tax Cuts Worked'
Mr. Bush has frequently highlighted unexpectedly robust government revenues, linking strong economic growth and deficit reduction to tax relief passed during his presidency and other Republican initiatives. "The tax cuts we passed worked," he said Tuesday, pointing to 18 consecutive quarters of economic growth. "Some in Washington say we have to choose between cutting taxes and cutting the deficit. Today's numbers show that that was a false choice."
Tuesday's report wasn't a surprise, given the increase in federal receipts. But critics say the upbeat deficit projections don't acknowledge the costs of fixing the Alternative Minimum Tax and don't include the full cost of the wars in Iraq and Afghanistan. Nonetheless, the improvement in the deficit forecasts will add fuel to the White House's contention that its tax cuts have bolstered economic growth, helping to boost revenues.
Government revenues are expected to grow 11%, or $246 billion, from 2005 to 2006, OMB said. So far this year, receipts have totaled $2.4 trillion, $115 billion higher than expected. That boost accounted for 90% of the reduction in the deficit projection.
"It's obviously good news that revenues are up, but the worst thing we could do with that news is take some kind of action on it and assume that the tax cuts pay for themselves," said Robert Bixby, executive director at the Concord Coalition, a nonpartisan budget watchdog. "Revenues aren't sufficient to pay for government spending, and that's the point of revenues."
Much of the revenue improvement is due to strong growth in corporate tax receipts, a reflection of the healthy profits companies have reaped during the current economic expansion.
Despite the better short-term fiscal scenario, the long-term outlook remains challenging due to the looming explosion of costs associated with spending on Social Security, Medicare and Medicaid. Critics say OMB's five-year budget window doesn't show an inevitable long-term surge in deficits and debt.
"This troubling outlook is not materially changed by the latest revenue figures," the Center on Budget and Policy Priorities said in a report Monday. "Simply put, there is little reason to believe the new figures indicate substantial long-term fiscal improvement or are a true indication of revenue adequacy."
Mr. Bush acknowledged that the government can't rely upon revenue growth alone to shore up its fiscal standing, calling on lawmakers to curb discretionary spending, pass a line-item veto, and tackle the growth of entitlement spending.
"This administration's going to continue trying to work with Congress to deal with these issues," Mr. Bush said of entitlement spending. "The time of playing politics with Social Security and Medicare and Medicaid is over. We need to fix this for younger generations of Americans to come."
The president said new Treasury Secretary Henry Paulson -- looking on in the audience -- agreed to join the administration so he could take on tough issues like Social Security. Mr. Bush challenged lawmakers to "feel that same sense of obligation."
Stephen Slivinski, director of budget studies at the libertarian Cato Institute, called Tuesday's report "a mixed blessing" because the short-term good news could lessen the appetite to tackle difficult issues like entitlements.
"If anything, this probably reduces the pressure to cut spending," Mr. Slivinski said. "From what I can tell, we're still seeing pretty large increases in spending."
In his State of the Union address earlier this year, Mr. Bush pledged to form a bipartisan commission to examine the impact aging Baby Boomers will have on entitlement spending. The White House still hasn't unveiled the panel, however, and Democrats are said to be reluctant to participate unless taxes are on the table.
The commission "seems all but dead," Cato's Mr. Slivinski said.
The growth forecasts that underpin the mid-session review were released last month. Real GDP is expected to grow 3.5% year-over-year in 2006, up 0.1 percentage point from the Bush administration's previous forecast, which was released in December. That would be equal to the 3.5% expansion in 2005.
GDP growth is seen slowing to 3.3% next year and cooling slightly more in following years to a rate at or above 3.0% a year through 2011. CEA Chairman Edward Lazear said that suggests the economy is heading toward a soft landing.
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