from an economic analysis by the Center on Budget and Policy Priorities:The improvement in the deficit may not extend beyond this year. As former CBO Director Douglas Holtz-Eakin observed a few days ago about the new deficit figures, “The world doesn’t end, but the deficit goes in the other direction next year.”<2>
The outlook for the budget over the next 10 years remains bleak. CBO’s August projections show that if Congress makes the President’s tax cuts permanent and extends relief from the alternative minimum tax, deficits will total nearly $3.5 trillion over the next 10 years (2007-2016), averaging $349 billion a year and never dipping below $280 billion a year even if costs for the wars in Iraq and Afghanistan fall substantially.<3> And the deficit outlook for subsequent decades, when increasing numbers of baby boomers will retire and, thus, receive Social Security and health care coverage, is substantially worse.
A deficit of $248 billion in 2006 means that the second largest six-year deterioration in the budget in 50 years has occurred, just behind the deterioration in the six-year period from 1998-2004. In 2000, there was a budget surplus equal to 2.4 percent of Gross Domestic Product. A deficit of $248 billion in 2006 equals 1.9 percent of GDP. This 4.3 percentage point deterioration in the budget is the second-largest six-year deterioration in half a century, just behind the 4.4 percentage point deterioration between 1998 and 2004.
The Administration is essentially celebrating a deficit that is lower in 2006 than in 2004 or 2005, even though deficits typically shrink during recoveries. More noteworthy is that
the budgetary record during the current recovery is worse than during any other recovery in recent decades.
The Administration’s claim that it has cut the deficit in half is misleading in several respects. First, the Administration uses a starting point of $521 billion, which was the deficit that it predicted for 2004 when it issued its proposed 2005 budget in February 2004. But analysts recognized from the outset that the $521 billion was inflated; the figure apparently was purposefully set high so the Administration could claim its policies were working when the actual 2004 deficit came in lower. At the same time that the Administration issued its $521 billion deficit forecast for 2004, CBO was estimating a deficit of $477 billion for that year. And the actual deficit for 2004 came in at $413 billion.
More importantly,
compared to the fiscal picture the Administration inherited in 2001, the fiscal situation has worsened sharply rather than improved, hardly evidence that Administration polices “are working.” The Administration has cherry-picked the deficit “high point” (selecting, in fact, a high point that never actually occurred) as well as what may be the deficit “low point” — the 2006 figure — as evidence of success. But deficits are expected to turn back up in 2007 or 2008. That deficits declined in 2005 and 2006 amidst an economic recovery tells nothing about the efficacy of Administration policies, especially considering that deficits turned to surpluses during the 1990s recovery, following tax increases in 1990 and 1993.
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