Psst, the Deficit’s Shrinking

National Review ^ | 01/13/2005 | Larry Kudlow

[Maigret]

Psst, the Deficit’s Shrinking

Why won’t anyone say it?

Here’s one story you won’t find on tomorrow’s front pages: “The U.S. Budget Deficit Is Shrinking Rapidly.” The headline would be accurate, but the mainstream media is much more interested in talking down this booming economy than telling it like it is.

This week’s Treasury report on the nation’s finances for December shows a year-to-date fiscal 2005 deficit that is already $11 billion less than last year’s. In the first three months of the fiscal year that began last October, cash outlays by the federal government increased by 6.1 percent while tax collections grew by 10.5 percent. When more money comes in than goes out, the deficit shrinks.

At this pace, the 2005 deficit is on track to drop to $355 billion from $413 billion in fiscal year 2004. As a fraction of projected gross domestic product, the new-year deficit will descend to 2.9 percent compared with last year’s deficit share of 3.6 percent.

Wire reports are loaded these days with accounts of an expanded trade gap (driven mostly by slower exports to stagnant European and Japanese economies, along with higher oil imports from the peak in energy prices). But there’s not a single report I can find that mentions the sizable narrowing in U.S. fiscal accounts. Behind this really big budget story is the even-bigger story: The explosion in tax revenues has been prompted by the tax-cut-led economic growth of the past eighteen months.

With 50 percent cash-bonus expensing for the purchase of plant and equipment, productivity-driven corporate profits ranging around 20 percent have generated a 45 percent rise in business taxes. At lower income-tax rates, employment gains of roughly 2.5 million are throwing off more than 6 percent in payroll-tax receipts. Personal tax revenues are rising at a near 9 percent pace.

Meanwhile, in the wake of strong stock market advances over the last two years, non-withheld revenues from individuals — including investor dividends and capital gains that are now taxed at only 15 percent — have jumped by over 14 percent.

Following the Clinton cap-gains tax cut and savings expansion bill of 1997, investment-related tax collections led to bull-market budget surpluses in the pre-9/11 period of 1997-2001. However, despite the flood of new revenues, this year’s federal budget is still overspending. Domestic spending on non-entitlement programs (excluding homeland defense) is rising at a 4.1 percent rate. That’s more than twice the pace of core inflation. But this may be changing.

According to the Washington Post, the Bush budget totals planned for fiscal year 2006 may be essentially unchanged from the totals for fiscal year 2005 (excluding defense and homeland security). According to reporter Jonathan Weisman, the administration’s first really tough budget request (due out next month) “would freeze most spending on agriculture, veterans and science, slash or eliminate dozens of federal programs, and force more costs, from Medicaid to housing, onto state and local governments.”

The rapid growth of federal health care and other entitlements would also be slowed markedly. Though the numbers are not yet available, this sounds a bit like Ronald Reagan’s tax-cutting budget of 1981. In addition to reducing the top personal tax rate to 50 percent from 70 percent, the Gipper proposed budget cuts that would be worth nearly $100 billion in today’s dollars.

Of course, the political screaming over the forthcoming budget has already begun. A passel of Democrats and at least one Republican, Sen. Craig Thomas of Wyoming, have written a protest letter to Josh Bolten, director of the Office of Management and Budget. Former-Gov. John Engler of Michigan, a Republican and the current president of the National Association of Manufacturers, has pledged to fight the elimination of various protectionist subsidies to his member firms.

However, Sen. Judd Gregg, the New Hampshire Republican who is the current chair of the upper chamber’s budget committee and a long-time Bush ally, is set to support the administration’s new budget discipline. This includes, by the way, Bush’s plan to reduce Social Security benefits by replacing wage indexing with a price-level formula and extending the retirement age — one or the other, or both — in return for personal saving accounts.

By the way, Treasury Secretary John Snow just completed a Wall Street tour where leading bond traders told him not to sweat the transitional costs for personal accounts. The traders said that an additional $100 billion a year over the next decade for transitional financing will be easily manageable. “A rounding error,” one senior trader told Snow.

A supply-side tax-reform movement, a shrinking budget deficit, newfound spending discipline, and a determination to confound conventional wisdom by reforming Social Security has George W. Bush’s second term off to a roaring start — even before he is officially sworn in.

[Rodney King]

"...slash or eliminate dozens of federal programs, and force more costs, from Medicaid to housing, onto state and local governments.”

It's obviously not enough if outlays have increased 6% this year.

[remember]

Compare this to the Carter deficit which at $50 Billion was 8.8% of GDP. Now THAT'S an economy killer. Anyone who says this current one is the largest deficit ever is economically illiterate.

Before you talk any more about economic illiteracy, you'd better check your own numbers. Carter submitted the budgers for 1978 through 1981. The deficits for those years were 2.7, 1.6, 2.7, and 2.6 percent of GDP respectively. His largest dollar deficit was $79.0 billion in 1981. Just two years later, in 1983, Ronald Reagan more than doubled that with a $207.8 deficit. That set the post-World War II record of 6.0 percent of GDP. You can see all of the deficits since 1940 in the tables at http://home.att.net/~rdavis2/def05.html. The following graph shows the deficits since 1970:

[remember]

Kudlow is cherry-picking numbers or, at the very least, is not telling the whole story. Following is an analysis of this editorial:

Here’s one story you won’t find on tomorrow’s front pages: “The U.S. Budget Deficit Is Shrinking Rapidly.” The headline would be accurate, but the mainstream media is much more interested in talking down this booming economy than telling it like it is.

This week’s Treasury report on the nation’s finances for December shows a year-to-date fiscal 2005 deficit that is already $11 billion less than last year’s. In the first three months of the fiscal year that began last October, cash outlays by the federal government increased by 6.1 percent while tax collections grew by 10.5 percent. When more money comes in than goes out, the deficit shrinks.

When more money comes in than goes out, you have a surplus, something this administration has not yet experienced. What Kudlow likely means is that, when revenues grow faster than outlays, the deficit shrinks. In any case, Kudlow is correct that the deficit for the first three months of this fiscal year is about $11 billion less than the first three months of the prior fiscal year. October, November, and December of 2003 had deficits of 69.5, 43.0, and 17.6 billion respectively, for a total deficit of 130.2 billion dollars. Those three months of 2004 had deficits of 57.3, 57.9, and 3.4 billion respectively for a total deficit of 118.2 billion dollars. That is a difference of $11.6 billion. However, the difference for December alone was $14.2 (17.6 - 3.4) billion. Hence, Kudlow is basing his entire argument that the deficit is shrinking on December alone. In any case, Kudlow continues:

At this pace, the 2005 deficit is on track to drop to $355 billion from $413 billion in fiscal year 2004. As a fraction of projected gross domestic product, the new-year deficit will descend to 2.9 percent compared with last year’s deficit share of 3.6 percent.

Kudlow must be using some new type of math here. At the pace of $11.6 billion dollars every 3 months, the deficit would drop about $46.4 billion in a year. Kudlow, however, is projecting a drop of $58 (413 - 355) billion. That would be $14.5 billion every three months.

In the next paragraph, Kudlow goes on to say that this shrinking of the deficit has been caused by an "explosion of tax revenues" that has been "prompted by the tax-cut-led economic growth of the past eighteen months". He continues:

With 50 percent cash-bonus expensing for the purchase of plant and equipment, productivity-driven corporate profits ranging around 20 percent have generated a 45 percent rise in business taxes. At lower income-tax rates, employment gains of roughly 2.5 million are throwing off more than 6 percent in payroll-tax receipts. Personal tax revenues are rising at a near 9 percent pace.

The first graph and table at http://home.att.net/~rdavis2/mts.html shows the receipts, outlays, and surplus or deficit over every three-month period since 1998. As can be seen, corporate tax receipts did rise from 43.2 to 62.4 billion (in October to December) for a rise of nearly 45 percent. However, they are only up about 12 percent from their level of $55.7 billion in the same period of 2001.

Similarly, personal tax revenues did rise from $198.7 billion to $216 billion, an increase of about 8.7 percent. However, they are still down about 4.6 percent from their level of $226.3 billion in October to December of 2001. On the other hand, receipts from employment and general retirement (chiefly payroll taxes) are up about 12.4 percent since October to December of 2001, similar to corporate taxes. Hence, the receipts most affected by the tax cuts are down about 4.6 percent while the other receipts are up about 12 percent.

A clearer view of the trend can be seen in the second graph and table at the aforementioned URL. They show the receipts, outlays, and surplus or deficit over every twelve-month period since 1998. As can be seen, total receipts went down from early 2001 to mid 2003 and have just recovered back to about where they were in April of 2000 (heading up) and in March of 2002 (heading down). Corporate tax receipts are just 2.5 percent below the peak they reached in January of 2001 and employment and general retirement receipts are at a new high. The laggard has been individual income taxes. They have almost recovered the level that they were in September of 1998, the earliest full year for which the Treasury has records online.

The deficit for the last 12 months (calendar year 2004) is $401 billion, nearly 12 percent below the largest deficit of $455.4 trillion reached in the 12 months ending in April of 2004. However, it's still 1.2 percent above its level one year ago (calendar year 2003). In any event, Kudlow concludes the editorial:

A supply-side tax-reform movement, a shrinking budget deficit, newfound spending discipline, and a determination to confound conventional wisdom by reforming Social Security has George W. Bush’s second term off to a roaring start — even before he is officially sworn in.

In fact, the deficit and individual income tax receipts have just begun to recover from their lows reached in late 2003 and early 2004. The only "roaring" to be heard has been in spending and, to a lesser extent, those receipts whose tax rates have not been cut.

The latest version of this story can be found at http://home.att.net/~rdavis2/kudlow3.html. In addition, following is the second graph referenced above: