Budget Outlook Looking A Little Better in 2004? Jeff Lemieux
April 8, 2004
Yesterday, the Congressional Budget Office (CBO) released new monthly budget figures, which show the federal deficit worsening compared with last year. However, if revenues and outlays maintain their current trend, the deficit will be a little better than forecast, possibly in the range of $425 to $450 billion. In the longer run, an improving budget will depend on overseas military expenditures, continued economic growth, the degree to which tax cuts are allowed to expire on their "sunset" dates, and whether or not Congress decides to begin "paying for" its new spending or tax cutting initiatives.
In 2003, the federal budget deficit was $375 billion.
For 2004, CBO has forecast a deficit of $477 billion, while the Administration is predicting a higher figure: $521 billion.
(In January 2004, Centrists.Org's long-run projections assumed the deficit for fiscal year 2004 would be $471 billion, very close to CBO's estimate.)
However, the budget doesn't seem to be worsening quite as rapidly as CBO expected. For the first 6 months of this fiscal year, the deficit was $297 billion, up from $253 billion in the first 6 months of 2003. The deficit so far this year is 17 percent higher than last year.
By crude arithmetic, if the next 6 months continue on this trend, the full-year deficit would be about $440 billion, 17 percent higher than in 2003 (see Figure 1).
Figure 1.
Of course, this sort of back-of-the-envelope calculation is no substitute for real, detailed projections of outlays and revenues.
However, CBO's monthly budget report indicates that revenue estimators believe tax refunds in April may not be as large as predicted earlier, which implies higher-than-expected revenues in 2004.
To be sure, the April revenue surprise is likely to be relatively modest, perhaps $20-$30 billion. And the deficit is still getting worse, despite rapid economic growth and an improving labor market.
But good news is good news, and the budget seems to be looking slightly better in the short run.
In the longer run, there are several important, interrelated factors that will determine whether or not the deficit stays in the $400-$500 billion range, or starts to shrink.
1. Overseas military expenditures. The Administration and Congress have consistently underestimated military spending, and the recent uprisings in Iraq indicate there is not likely to be a reduction in overseas military costs any time soon.
2. Continued rapid economic growth. A flare-up in the Middle-East conflicts could raise oil prices and reduce consumer and business confidence this summer. Slower economic growth or a falling stock market would hurt tax collections in late-2004 and 2005. On the other hand, continued very rapid growth could boost revenues compared with current projections.
3. Tax "sunsets." Congress has granted a huge array of personal and business tax cuts that are scheduled to expire as early as this December. We have assumed that the original expiration dates were intended only to disguise the long-run cost of the tax cuts, and have interpreted Congressional and White House intent to be that the tax cuts should continue indefinitely. So far, this assumption has been validated -- no substantial tax cuts have expired and Congress seems intent on pushing back the sunset dates on an ad-hoc basis. However, if some of the tax cuts were allowed to expire, that would set an important precedent. It would improve the budget outlook considerably.
4. "Pay-as-you-go rules." The biggest dispute over the Congressional budget in 2004 is whether or not to reinstate procedural rules that force spending and tax bills that would increase the deficit to clear extra super-majority votes. In general, the Congressional leadership and Bush Administration want such rules only for spending, while many Democrats and some fiscally conservative Republicans are in favor of pay-as-you-go rules for both spending and tax cuts. If Congress decides to strip such "pay-go" rules from the budget, or includes gimmicky rules that would be ineffective or whose implementation would effectively be delayed, Centrists.Org's current, more pessimistic long-term budget outlook would be validated.
Centrists.Org will update its long-run projections in the coming weeks, based on this year's final Congressional Budget Resolution. If the budget indicates a sincere move toward spending discipline, allowing tax cuts to expire, and implementing pay-as-you-go budget rules, the long-term outlook will probably show reduced deficits, at least until the baby boom generation starts to retire toward the end of the decade.
Links:
Congressional Budget Office Monthly Budget Review (April 7, 2004)
Centrists.Org A "Duck-The-Issues" Budget -- Interpreting the Congressional Budget for 2005 (revised March, 19, 2004)
Centrists.Org CBO: Budget Outlook Worsens Slightly, Medicare and Medicaid Spending Up (February 28, 2004)
Centrists.Org Realistic Budget Targets and Some Initial Deficit Reduction Options (February 21, 2004)
Centrists.Org Deep Cuts in Non-Security Spending and Rapid Economic Growth Won't Balance the Budget (preliminary February 2, 2004)
Centrists.Org Issue Summary: Budget and Tax (Basics)
Centrists.Org New Detailed Issue Summary: Budget Process
