by Calculated Risk on 7/11/2006 06:24:00 PM

With the White House announcement today that the deficit will be smaller than they expected, it is worth looking at how the story is being reported.

Joel Havemann, at the LA Times, does a solid job: Bush Credits Tax Cuts for Deficit Shrinkage

President Bush today delivered what he called "some good news for the American taxpayer" — a budget update that shows the deficit for this year shrinking from the $423 billion forecast five months ago to $296 billion now.

Notice how Havemann correctly notes this is an improvement in the "forecast". The Bush Administration routinely overestimates the deficit and then touts their "improvement". Havemann offers the opposing view:

Rep. John Spratt of South Carolina, the top Democrat on the House Budget Committee, pointed out that when Bush came into office in January 2001, the official White House budget projection showed a $305-billion surplus. So the new projected deficit of $296 billion represents a swing of $600 billion, Spratt said.

Although I'd prefer a comparison of the General Fund deficit for '01 and '06 (it would be a larger swing since annual Social Security revenues have been increasing), this still shows the damage done to the US fiscal position by the Bush tax cuts.

And Havemann pulls up some old Bush projections:

In 2002, the White House estimated that revenues would reach $2.5 trillion in 2006 under the tax laws then in effect. The revenue re-estimate issued today was $2.4 trillion. ...Spending in 2006 was projected in 2002, based on laws then in effect, to reach about $2.2 trillion; it is now estimated at $2.7 trillion.

Well done. An excellent article.

From the WaPo: Budget Deficit Estimate Drops to $296B. After quoting Mr. Bush, the article offers the opposite view:

Congressional Democrats blasted Bush's speech, saying that the deficit remains too large and charging that the administration put out a gloomy early forecast in order to claim better-than-expected results later on.

And they properly note:

... the White House acknowledges that in the long run, the nation's fiscal outlook remains bleak. ... "The projections are that the Social Security surplus will peak in 2010, and diminish every year thereafter, so ultimately, instead of collecting 5 cents on the national dollar and paying out 4 1/2 cents, we will continue to collect 5 cents and pay out 7 cents," [Douglas Holtz-Eakin, a former CBO director and Bush White House economist.] said. "And that's the good news. The bad news is Medicare. The demands on the Treasury go from 4 cents on the national dollar to 22 cents in the next 50 years."

The outlook is bleak, primarily because of General Fund issues: the structural General Fund deficit and Medicare. In comparison, Social Security is a minor problem. But at least the former Bush economist is being honest about the outlook: bleak.

The WaPo also notes some of the reasons for the improvement:

Among the fastest-growing types of revenue were corporate income taxes, which rose 26 percent in the nine months ending June 30, according to the CBO. ... Another major source of revenue growth were taxes that are not withheld from paychecks, typically capital gains and year-end bonuses for Wall Streeters and other upper-income people. Revenue from those types of taxes has risen 20 percent, compared with 8 percent for taxes withheld from the paychecks of salaried employees.

Since the authors are discussing the Unified Budget deficit, they should note that the annual Social Security surplus has been increasing significantly, contributing to the improvement. They should also note the improvement in the legally mandated budget deficit (the General Fund) has been minor.

The bad news is profit growth appears to be slowing, and the housing bubble is starting to unwind (impacting not withheld tax revenues next year). In my yearly projections, I noted: "Although I expect the General Fund deficit to grow to around $600 Billion in 2006, I don't think it will become a huge story until '07 or '08." My reasoning was the impact of a slowing economy would impact next year's corporate profits and 'not withheld' tax revenues.

Overall these stories are pretty good. I'd prefer switching to the General Fund (as required by law), but that is going to take some work.