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Are Deficits Caused by Tax Cuts?

Posted By Barry Ritholtz On April 28, 2004 @ 5:30 am In Finance | Comments Disabled

NYT_home_banner.gif [1]

The NYTimes [1] discussed the CBO’s Analysis of the President’s 2005 Budget, and Deficit Analysis. I’ve been meaning to get to it, as its a somewhat overlooked issue. Now that the Greenspan testimony is behind us, let’s take a gander at the Budget, and see what causes deficits:

“When President Bush and his advisers talk about the widening federal budget deficit, they usually place part of the blame on economic shocks ranging from the recession of 2001 to the terrorist attacks that year. But a report released on Monday by the nonpartisan Congressional Budget Office estimated that economic weakness would account for only 6 percent of a budget shortfall that could reach a record $500 billion this year. . .

The new numbers confirm what many analysts have predicted for some time: that budget deficits in the decade ahead will stem less from the lingering effects of the downturn and much more from rising government spending and progressively deeper tax cuts.

Administration officials do not dispute the basic thrust of the agency’s estimate, but they still say that faster growth and spending restraints can reduce the deficit in five years.”

There are 2 issues here which seem to get confused into one: 1) What causes the present deficit? and 2) What will determine the size of future deficits/surpluses.

The source of the present deficit is the easier question: Its simply a matter of revenues versus expenditures. Whenever Uncle Sam spends more than he takes in, deficits result.

There are two sides to the equation: Spending and Revenue. The present administration has increased spending at the same time it decreased revenues. The math on this is simple enough so that even Supply Siders can understand it. Things get more complicated when we look out a few years. Estimates for the growth rate of the country vary dramatically, so revenue projections will similarly vary.

What makes the Congressional report so damning however, is their conclusion “that the ‘cyclical’ problems of slower growth are a tiny part of the overall budget problem. The Congressional agency estimated that slower growth reduced tax revenues by $53 billion in 2002, accounting for a third of the budget deficit that year. In 2003, the agency estimated that subpar growth cut tax revenues by $68 billion. The overall budget deficit in 2002 swelled to $375 billion as a result of spending on the Iraq war and Mr. Bush’s tax cuts.

That means that the structural changes introduced into the budget are not only the underlying cause of the deficit, but will also generate deficits going forward — even if we meet the most aggressive target’s for economic growth.

Higher military spending and homeland security spending is a significant issue. But the CBO is telling us that deeper revenue losses, and not temporary economic distress, is the primary source of tyhe deficit.

Source:
Deficit Study Disputes Role of Economy [2]
By EDMUND L. ANDREWS
NYTimes, March 16, 2004

http://www.nytimes.com/2004/03/16/politics/16BUDG.html


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[2] Deficit Study Disputes Role of Economy: http://www.nytimes.com/2004/03/16/politics/16BUDG.html?ex=1394773200&en=31d3c781f1b7b407&ei=5007&partner=USERLAND

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