Responsibility for the Federal Budget Deficit

I’ve taken the liberty of composing a picture that addresses the implausible notion that the Federal government’s budget deficits are the result of “ungoverned forces”.

The graph below shows the on-budget federal budget balance – that is, the budget balance excluding the Social Security Trust Fund surplus – and the ways in which various deliberate policy choices have contributed to it. The lower-most heavy red line shows the actual budget deficit that we’ve seen over the past several years, as well as the forecast for the remainder of the Bush presidency from the CBO (see the January 2006 report: Budget and Economic Outlook), including the recently-passed extension of the cut in capital gains taxes and AMT relief. Excluding the Social Security surplus, the deficit will be around $550bn this year, and will remain at that level for the rest of Bush’s time in office. (Though it’s worth noting that if there’s a recession any time in the next three years the deficits will grow to be much larger.)

This deficit is then decomposed into various components that correspond to specific legislative changes made by the Bush administration and the Republican Congress over the past five years. The CBO estimates the cost of each change to tax laws and spending legislation, and provides those estimates in their regular “Budget Outlook” reports. I’ve compiled all of those cost estimates and put them together to make this graph.

So for example, in 2005 the actual on-budget deficit was $494bn. But many of the choices made by the Bush administration and Congress over the years have contributed substantially to this figure. Spending on Iraq was about $80bn during 2005; all of the various tax cuts deferrals over the past five years cost about $211bn in 2005; specific decisions to increase defense spending over the past five years, excluding the costs of the war in Iraq, cost about $142bn in 2005; legislative changes to various entitlement programs cost about $32bn in 2005; and specific changes made to non-defense discretionary spending over the past five years cost about $49bn in 2005.

If none of these deliberate changes to taxes and spending had happened – in other words, if tax laws had remained the same as they were in Clinton’s last year in office, discretionary spending had simply grown at the rate of inflation, Iraq had not been invaded, and entitlement programs had remained unchanged by new legislation – then the federal budget balance would have followed the top-most blue line instead of the bottom-most red line. Rather than a budget deficit of $494bn in 2005, the federal government would have run a surplus of $18bn. Rather than facing a future of massive and growing deficits as far as the eye can see, the US would be enjoying the prospect of being able pay down some of its national debt in preparation for the looming retirement costs of the baby boomers.

(If you’re worried that this analysis omits the positive revenue feedback effects of the tax cuts, you’re quite right – but as I’ve demonstrated before, those feedback effects are really tiny so we can safely ignore them.)

There are two crucial points to take from this picture. First, the Bush tax cuts are alone responsible for close to half of the Bush administration’s chronic and massive budget problem. The decision to dramatically increase defense spending, including the war in Iraq, accounts for most of the rest of the problem. As I’ve emphasized previously, increased non-defense discretionary spending is only a tiny contributor to today’s budget problem.

Second, it is quite clear that the deficit is entirely due to specific decisions made by the Bush administration and Congress. External, “ungoverned” forces have not caused our budget mess. That honor belongs entirely to our policy-makers in Washington.