The Budget Illusion
EDITORIAL, NYTimes on
the Web, January 28, 2007
In the State of the Union speech,
President Bush said that the budget deficit had been cut in half from 2004 to
2006. Not quite. The deficit declined, but not by half, from $412
billion to $248 billion. If you measure it as a percentage of the economy,
Mr. Bush was off by an amount equal to about $15 billion.
Then, Mr. Bush greatly compounded his otherwise modest exaggeration by taking
credit for the reduction, when the deficit really fell despite his policies, not
because of them. The distinction is crucial, to understand both the
current mess — in which debt is mounting just as huge obligations are coming due
for Medicare and Social Security — and how best to get out of it.
The drop in the deficit over the past few years was due largely to the cyclical
recovery from the earlier recession, and to a boost in revenue when temporary
business tax cuts expired after 2004.
Mr. Bush, meanwhile, has pursued a single-minded strategy of spending more while
slashing taxes. That is the opposite of deficit reduction; it has made the
budget hole deeper than it would have been. Still, Mr. Bush wants you to
believe that tax cuts caused the economic recovery, and thus the budget
improvement. If you follow that logic, the key to continued improvement
would be continued tax cuts, and that is just what Mr. Bush called for last
week. He conjured a bright future in which the deficit disappears after he
leaves office, without anyone ever having to raise taxes.
That was the speech, and then there is reality, which came knocking within days
when the nonpartisan Congressional Budget Office released its annual 10-year
budget outlook. The outlook is for a cumulative deficit of $2.9 trillion
to $3.4 trillion — about $300 billion a year — if, as Mr. Bush wishes, the tax
cuts are extended beyond their scheduled expiration in 2010 and tax relief
continues for Americans wrongly afflicted by the alternative minimum tax.
In arriving at its estimate, the budget agency also assumed that costs for the
war in Iraq would start going down next year, an assumption that, if proved
wrong, would result in even higher deficits.
In the absence of overt tax increases, that leaves Mr. Bush only three ways to
erase the deficit. He would have to make pie-in-the-sky assumptions of
revenue growth, which would be dicey in any event, but folly at a time when the
economy is slowing. He would have to renege on his pledge to protect
taxpayers from the alternative minimum tax, a huge backdoor tax increase.
Or he would have to persuade lawmakers to make cuts in spending even more
draconian than those already dodged by the previous Republican-controlled
Congress.
Fortunately, such cuts are necessary only if one accepts Mr. Bush’s premise that
taxes must never rise under any circumstances. That is clearly a false
premise. Mr. Bush’s tax cuts should largely be allowed to expire. Facing
that truth is not a fiscal challenge, it’s a political one.
Mr. Bush will not meet it. But a future president and Congress will have
to.
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