The Story Behind This Year's Deficit Forecasts

Times Staff Writer

After months of languishing, the federal budget became news again last week. Here's a look at why -- and at some of its twists and turns.

Question: Why is there budget news in July?

Answer: Twice a year, in February and July, the White House budget office publishes updated spending and revenue estimates. In the estimates released Tuesday, the deficit projection was $127 billion less than in February. The White House staged a public ceremony at which President Bush welcomed the new forecast.

Q: What accounts for the improved budget picture?

A: Tax revenue is now expected to be about $100 billion more than forecast in February. Bush credits his tax cuts for this happy result. He says the tax cuts have generated economic activity by leaving taxpayers with more money to spend and thus giving businesses more demand to meet.

Q: You mean you get more tax revenue if you cut tax rates?

A: Here's how the president put it on Tuesday: "Some in Washington say we had to choose between cutting taxes and cutting the deficit.... Today's numbers show that that was a false choice. The economic growth fueled by tax relief has helped send our tax revenues soaring."

Q: That sounds too good to be true. Do the president's economists agree with him?

A: Apparently not. The report with the updated budget estimates quoted a Treasury Department study, which implied that the maximum revenue bonus from the tax cuts was $20 billion to $30 billion a year. That is about a tenth of what the Treasury would have received in revenue if Bush had not cut the tax rates.

Q: Why, then, did February's revenue estimate for this year turn out to be so wrong?

A: Estimating revenue is more art than science. Early estimates are routinely way high or way low. This was the third straight year of underestimating revenue by at least $80 billion, preceded by three straight years of overestimates of equal magnitude during a period when revenue was shrinking. It's as if the forecasters consistently underestimate the current trend, whether toward more revenue or less.

Q: So, the latest estimating error didn't hurt the administration?

A: Plenty of Washington budget-

watchers suspect that the administration tweaked its February forecast to make the revenue estimate as low as possible so there would be improvement to trumpet in July. "Given the way they've spun the result," said Richard Kogan, a senior budget analyst with the liberal Center on Budget and Policy Priorities, "you have to suspect they knew that their February revenue estimate was probably too low, since history and outside analysts said as much."

Q: What does the administration say to that?

A: "That's insane," said White House Press Secretary Tony Snow. Why, he wonders, would the administration have risked five months of bad publicity after the February estimate for one good hit in July? And the nonpartisan Congressional Budget Office, which has a reputation as a straight shooter, issued a revenue estimate in March that was only $20 billion greater than the administration's estimate.

Q: Does the new revenue estimate mean I can quit worrying about the deficit?

A: Not just yet. The deficit for this year, which in February was forecast at

$423 billion, is still forecast at $296 billion, which would make it the fourth largest on record as measured in dollars. Measured as a share of the national economy, which is a more meaningful gauge, the deficit would be 2.3%, which would make it a little above average for the years since World War II.

Q: That's not so bad, is it?

A: It wouldn't be if this were 20 years ago, when President Reagan's tax cuts were generating deficits as great as 4.7% of the economy -- double this year's level. But the outlook was brighter then because the baby boom generation was moving into its prime income-earning -- and tax-paying -- years. Now, the eldest baby boomers are a year and a half away from qualifying for Social Security and 4 1/2 years from Medicare. That's going to put a huge strain on the budget.

Q: Do deficits matter? The economy seems to be doing all right in spite of them.

A: Economists typically worry when

annual deficits are large enough to drive up the national debt -- the accumulation of deficits -- faster than the economy is growing. Under Bush, the debt has increased from 33% of annual economic output to 38.5%, but that's still short of the nearly 50% registered about 10 years ago. A growing debt means the government must borrow more to cover it, which means paying out more in interest. When the government is borrowing a lot of money, it tends to squeeze out private borrowers or drive up the interest rates they must pay to borrow, thereby discouraging private investment and dampening economic activity.

Q: Why doesn't the government just cut out wasteful programs to control the deficit?

A: That would be like putting a Band-Aid on a bullet wound to the chest. Even if everyone agreed on "waste," there aren't enough such programs to make a difference. Today, defense

programs, interest on past government borrowing, Social Security, Medicare and Medicaid account for almost

70% of the budget. And, as the nation's population ages, the last three categories are growing so fast that projections show them absorbing every tax dollar 25 years from now. If that should happen, there would be nothing left for

defense, highway construction, education aid or any of the myriad things the government funds.

Q: Why aren't elected officials doing something?

A: They are; they're blaming each other. Most Republicans are willing to talk with the Democrats about cutting spending but not about raising taxes. Democrats demand that all options be on the table.

Q: With Republicans in charge of the White House and Congress, isn't

government spending already being cut?

A: To the contrary. In inflation-adjusted dollars, spending has risen faster under Bush -- more than 5% a year -- than under any president since Lyndon B. Johnson. Conservatives who favor Bush's tax cuts are up in arms over his tendency to spend.

Q: Where is the money going?

A: Total spending has shot up by about $850 billion -- from $1.86 trillion in 2001, Bush's first year in office, to $2.71 trillion this year. Defense spending, propelled by the wars in Iraq and Afghanistan, accounts for more than a quarter of the increase, or $230 billion. Homeland security, the domestic component of the administration's war on terrorism, is up by $50 billion. The giant benefit programs are responsible for most of the rest. Medicare, boosted by the Bush-sponsored prescription drug benefit, has grown by $150 billion, and Medicaid, the government's other giant health insurance program, is up $60 billion. Social Security accounts for $120 billion. The remaining $240 billion is sprinkled through everything else the government does.

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