On That Incredibly Shrinking Deficit
James Capretta rehashes some often heard spin regarding fiscal policy:
Many Americans would be surprised to learn that the federal budget outlook has improved considerably over the last three years. The gap between federal revenue and spending continues to narrow, with the full-year deficit for 2007 likely to come in near 1.1 percent of GDP (or lower) – which would make 2007 one of the best budget years of the last four decades. The public’s surprise at the improving budget picture would be understandable since a shrinking deficit runs directly counter to the media’s portrayal of a hopeless U.S. fiscal situation caused by the Bush tax cuts. The remarkable, three-year revenue surge simply does not fit with that storyline.
It also does not fit with the forecasts in table B.78 of the most recent Economic Report of the President. For fiscal year 2007, total Federal debt is expected to grow by $556.4 billion, which would represent over 4% of GDP. The forecasted increase for fiscal year 2008 is even higher. Capretta, however, is talking about the unified deficit which represents the increase in the debt held by the public. The Economic Report of the President is suggesting that the debt held by the public will rise by $254.3 billion or 1.75% of GDP.
But could the Economic Report of the President be up to the old Bush trick – forecast a high deficit so when the actual deficit comes in lower, tout the same free lunch supply-side stupidity that Capretta writes regarding growth and tax revenues? Even if the debt held by the public grows by only $150 billion, the General Fund deficit will still be over $450 billion. This allegedly incredible shrinking deficit is not evidence of some Laffer curve supply-side stupidity. Rather, it is a combination of two factors. One is that economies tend to recover from recessions – with or without tax cuts. The other is the rising Trust Fund surpluses. But Capretta is writing for the National Review, which means he pretends that the Trust Fund does not exist.