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:
