The Cyclically Adjusted Budget Deficit

The CBO has released its estimates of the “cyclically adjusted” budget balance for the US. What does that mean? The CBO explains:

Calculations of cyclically adjusted budget measures attempt to remove the effects of the business cycle on revenues and outlays (that is, the cyclical part of the budget). For example, cyclically adjusted revenues exclude the loss of revenues that automatically occurs during recessions. Likewise, cyclically adjusted outlays exclude the additional spending that follows automatically from a rise in unemployment. The difference between those two measures is the cyclically adjusted balance.

The chart below shows the actual budget balance (in blue) and the cyclically adjusted balance (in orange). Figures for 2004 and 2005 are forecasts.

The conclusion? Any claim by the Bush administration that the budget deficit is substantially due to the state of the economy is complete hogwash. Even if the economy had been humming along at full capacity, the US would have had a budget deficit of over $300 billion in 2003 and over $400 billion in 2004. As we already knew, the budget deficit is the result of intentional, discretionary tax and spending changes, and nothing else.

Kash