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Tuesday, July 11, 2006

Has the Budget Outlook Improved?

Do recent news headlines trumpeting a falling deficit signal an improved budget outlook? Not according to the Center on Budget and Policy Priorities. The CBPP issues cautions about the optimistic claims the administration is making based upon recent budget numbers. This is a long report, but here are some highlights:

The Recent Upturn in Revenues and OMB’S Mid-Session Review, by By Aviva Aron-Dine, Joel Friedman, Richard Kogan, and Isaac Shapiro, CBPP: Summary Monthly budget statements from the Congressional Budget Office show that revenue growth this year has been stronger than anticipated.  ... This year’s strong growth in revenues follows upon stronger-than-anticipated revenue growth in 2005.  Members of the Administration greeted the higher-than-anticipated 2005 revenue growth as reason for optimism about the economy and the budget outlook and as evidence that the President’s tax cuts were “working.”  Some Administration officials, including the President and Vice President, have even stated or implied that the tax cuts are paying for themselves.  (See box on page five.)

Administration officials may draw similarly optimistic conclusions from this year’s Mid-Session Review.  But while unexpectedly high revenues are good news for the Treasury, the budget and economic picture remains far less rosy than the Administration’s claims suggest, and the tax cuts remain a major contributor to the nation’s serious fiscal problems.

  • Revenue growth over the current business cycle has been lower than in comparable past periods; in fact, revenue growth over the current business cycle is near zero after adjusting for inflation and population growth. Even when the stronger revenue growth now projected for 2006 is taken into account, real per-capita revenues have simply returned to the level they reached more than five years ago when the current business cycle began in March 2001.  ...

  • Revenue “surprises” are relatively common. Unanticipated revenue gains occurred in nearly every year of the 1990s expansion.  ...  Moreover, there were negative revenue “surprises” in each year from 2001 through 2003, with end-of-year revenues well below the levels OMB had projected..., even after adjusting for the cost of enacted tax cuts.   When tax cut supporters take recent positive revenue “surprises” as evidence that tax cuts are “paying for themselves,” they ignore these other facts.

  • There is no evidence of a tax-cut fueled economic boom. Economic data, now available through the first quarter of 2006, show that the current economic expansion remains weaker than the average post-World War II economic recovery, with economic growth falling below — and employment and wage and salary growth falling far below — historical norms.  ...[T]he evidence does not support Administration claims that the 2003 tax cuts caused the improvement.  The economy’s performance improved at about the same point in the 1990s recovery, and that improvement coincided with tax increases enacted in 1993.

  • There is strong evidence that increased income disparities between high-income households and the rest of the population have contributed to the recent revenue gains. High-income taxpayers pay taxes at higher rates.  As a result, an increase in the share of the nation’s income that goes to these households leads to an increase in revenues, even if there is no increase in overall economic growth.  ...

  • Much of the unanticipated revenue increase comes from strong growth in corporate revenues, which reflects exceptionally strong growth of corporate profits during the current business cycle. Corporate profits have increased more rapidly during the current economic expansion to date than in any other comparable post-World War II period.  This reflects the fact that corporate profits have captured an unusually large share of the total economic gains during the current recovery, while wages and salaries have captured an unusually small share.  ...

  • Even with higher-than-anticipated revenues this year, budget deficits remain disturbingly large for a mature economic recovery.  CBO has suggested that this year’s budget deficit may be around $300 billion.  While that is lower than the deficit estimate issued at the start of the year, it still amounts to a deficit equal to 2.3 percent of GDP.  That the deficit remains so large this year is particularly disturbing given that the U.S. is now in the fifth year of an economic expansion, and deficits likely will rise when the expansion ends...

In short, while the Administration is likely to emphasize the improvement in OMB’s revenue estimates since February, the nation’s serious fiscal challenges remain.  The recent revenue increases do not materially alter the longer run fiscal outlook.  Nor do they change the fact that the Administration and Congress have enacted large tax reductions that have significantly increased the deficit, and that despite these tax cuts, economic growth in the current recovery has been unexceptional. ...[continue reading]...

    Posted by on Tuesday, July 11, 2006 at 12:15 AM in Budget Deficit, Economics, Policy, Politics | Permalink  TrackBack (1)  Comments (26)

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    » The Deficit Picture from QandO

    I'd like to see evidence a bit more rigorous than "taxes were cut...and eventually, a few years later, revenues rose!" [Read More]

    Tracked on Tuesday, July 11, 2006 at 11:09 AM


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