Deficit’s Good News Less Than Meets the Eye

Times Staff Writer

When President Bush releases the traditional midsummer update on the budget today, he is expected to announce that federal revenue has soared above predicted levels and that the deficit is headed for a welcome decline from earlier estimates -- as much as 30%, or $125 billion, below the level projected just five months ago.

And the president will likely attribute the windfall to his tax cuts, which the administration says are stimulating economic activity and generating the torrent of tax revenue.

But the apparent good news will not strike some economists as surprising: This will be the third year in a row that the administration put forth relatively gloomy deficit forecasts early on, only to announce months later that things had turned out better than expected. To some skeptics, it’s beginning to look like an economic version of the old “expectations” game.


Even economists who hesitate to accuse the White House of playing games say the claims of good news on the budget are unfortunate because they make people unjustifiably sanguine about the government’s current fiscal health.

And the focus on this year’s budget will distract attention from the real budget crisis, which will begin in two years as the eldest of the baby boom generation become eligible for Social Security benefits.

“Our problem is our large long-term deficit, and the sooner we deal with that the better,” said Comptroller General David M. Walker.

Walker, who is head of Congress’ Government Accountability Office, warned of “a false sense of security. We’re in much worse shape fiscally today than we were a few years ago.”

To divert attention from that continuing reality, critics suggest, the administration has borrowed a gambit favored by political candidates, who commonly try to lower expectations about how they will fare to magnify the apparent size of their victory if they win.

In the case of the budget, they say, the administration has begun to low-ball its revenue estimates at the beginning of a budget cycle to set up good news a few months later.


“The White House would have signaled that it was serious about the budget if it had decided not to spin the numbers,” Stanley Collender, a budget specialist with Qorvis Communications, wrote for National Journal. “The fact that it is choosing to do so points out directly that, in spite of what appears to be good numbers, nothing much will have changed.”

Administration officials declined to comment on the numbers until they were published. But Republican budget officials have been saying for weeks that the government was reaping more tax revenue than forecast five months ago.

The figures scheduled to be released by the administration today are expected to show revenue some $100 billion greater than the $2.2-trillion forecast in February, with the deficit at least that much smaller than the $390-billion forecast.

Senate Budget Committee Chairman Judd Gregg (R-N.H.) told a group of reporters recently that he had “no doubt” that government revenue would be smaller this year if Congress hadn’t cut tax rates in 2001 and 2003. The reason, he said: Without the tax cuts, the 2001 recession would have been much deeper, and the economy would be much smaller.

Many independent budget analysts are skeptical.

“I’d be very cautious of statements that tax cuts pay for themselves,” said Robert L. Bixby, executive director of the Concord Coalition, which lobbies for fiscal austerity. “It’s way too early to declare victory.”

At the liberal Center on Budget and Policy Priorities, experts argue that not only will today’s numbers look better than February’s, but they will leave room for further improvement when the administration announces the actual totals for fiscal 2006 just before the November congressional elections.


“Even with these re-estimated revenues,” said Robert Greenstein, the center’s executive director, “there’s something a little unreal about celebrating deficits of ‘only’ $300 billion, with the baby boom crunch just around the corner.”

Contrary to the administration’s rhetoric, Greenstein said, tax revenue has grown more slowly during this period of economic expansion than during previous expansions. Adjusted for inflation, he said, government revenue this year will probably fall short of the level it reached six years earlier. And as a share of the U.S. economy, revenue will be about 10% short of its 2000 level.

Analysts at the center said revenue in 2006 would remain about $200 billion short of the level the White House and Congressional Budget Office projected in 2001, before the tax cuts.

A year ago, for the 2005 budget, the administration changed its February revenue estimate of $2.036 trillion to $2.154 trillion in July. The deficit improved by less because spending also rose.

These last two years of low initial revenue estimates do not mark the first time the administration has taken advantage of budget forecasts.

Early in 2004, it projected a deficit of $521 billion for the fiscal year that was then 4 months old. It used that figure as the benchmark for its promise to cut the deficit in half within five years. That made its task easier: The high estimate, when reduced by reality, gave the administration a head start on its pledge.


Revenue also came in higher than forecast that year, and the actual 2004 deficit was $412 billion -- still a record, but not quite so large.