« Keep Alberto Gonzales Off the Supreme Court | Main | The High-Wage Model »

July 12, 2005

Unspinning the Budget Deficit

Paul Krugman on the budget deficit outlook:

Un-Spin the Budget - New York Times: By PAUL KRUGMAN: Later this week the White House budget director plans to put on an aviator costume, march up to a microphone and declare Mission Accomplished in the war on deficits.... [T]he administration is poised to do the same thing on the budget that it has done again and again in Iraq: claim that a modest, probably temporary lull in the flow of bad news shows that victory is around the corner....

So let me do some pre-emptive de-spinning and debunking.

To understand where the budget deficit came from, you can't do better than the Jan. 18, 2001, issue of the satirical newspaper The Onion, which predicted the future with eerie precision. "We must squander our nation's hard-won budget surplus on tax breaks for the wealthiest 15 percent," the magazine's spoof had the president-elect declare. "And, on the foreign front, we must find an enemy and defeat it."

And so it has turned out. President Bush has presided over the transformation of a budget surplus into a large deficit, which threatens the government's long-run solvency. The principal cause of that reversal was Mr. Bush's unprecedented decision to cut taxes... [in] an expensive war.

Where's the good news? Well, for the past four years actual tax receipts have consistently come in below expectations, so that the deficit is even bigger than one might have predicted.... Recent tax numbers, however, finally offer a positive surprise.... The usual suspects on the right are already declaring victory over the deficit....

But... revenue remains far lower than anyone would have predicted before the tax cuts began. In January 2001 the budget office forecast revenues of $2.57 trillion in fiscal 2005... the actual number will be at least $400 billion less.... Ed McKelvey of Goldman Sachs believe[s] that even the limited good news on the budget is a temporary blip.... Douglas Holtz-Eakin, the director of the Congressional Budget Office... declares that... "[for] 2008, 2009 or 2010, that vision is the same today as it was two months ago."...

[T]he upside surprise in tax receipts is coming from... tax payments from corporations, up both because last year corporate profits grew much more rapidly than the rest of the economy and because... a temporary tax break... expired. Both are one-time events. The other source of increased revenue is nonwithheld income taxes... capital gains on stocks and real estate... bonuses.... Again, this revenue boost looks like a temporary blip....

[W]e're still deep in the fiscal quagmire, with federal revenues far below what's needed to pay for federal programs. And we won't get out of that quagmire until a future president admits that the Bush tax cuts were a mistake, and must be reversed.

Posted by DeLong at July 12, 2005 03:35 PM