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President’s policies won’t deliver promised deficit cuts

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Snapshot for December 8, 2004.

President’s policies won’t deliver promised deficit cuts

Last February, the Bush Administration set a goal of reducing the federal budget deficit to 1.6% of the gross domestic product (GDP) in five years, by fiscal year 2009.  This would be a significant reduction from the 2004 level of 3.6%, or $413 billion.

Unfortunately, the president’s budget rhetoric does not square with his actions.  The figure below shows the divergence of actual fiscal policy decisions from the budget promises of February 2004.

Present and projected federal budget deficits

The bar on the left shows the 2004 deficit of 3.6% noted above.  The middle bar shows the 1.6% target for 2009, well under the 2.2% average deficit for the past 40 years, which is reflected in the horizontal line.

In the bar on the right we see the consequences of actual policy decisions to date.  The bottom blue region of the bar represents the Congressional Budget Office (CBO) “baseline” deficit in 2009 under tax and spending policies in force as of September 2004.  This grossly understates future deficits because CBO assumes what no one expects to happen:  that scheduled “sunsets” of tax cuts passed since 2001 will actually occur.  The impact of making all such tax cuts permanent, including measures to forestall increases in the Alternative Minimum Tax, is reflected in the purple segment of the bar on the right of the figure.

After the November elections, Congress reconvened to finish its work on appropriations for fiscal year 2005 (which began in October).  News reports suggested that the final legislation imposed a significant slowdown in spending growth.  It is true that domestic spending was reduced, but reports of overall spending restraint were exaggerated. In the summer of 2004 Congress enacted increases in defense spending that completely offset the austerity in domestic programs.  In addition, Congress routinely takes a second bite of the spending apple in the spring by passing “supplemental appropriations,” and the White House has already signaled that it will propose a supplemental that will have substantial additional defense spending. 

The net impact of FY2005 budget decisions thus far is to increase projected outlays in 2009 by $9 billion (including debt service).  This is reflected in the light blue region of the bar on the right.  Supplemental appropriations in the spring could add to this amount.  (Whether the supplementals continue at present levels will depend on the future of U.S. military operations in Iraq and Afghanistan.)

Finally, Congress passed widely criticized corporate tax cuts that reduce the apparent cost of the bill through a host of scheduled phase-outs that may never come to pass.  Putting this additional cost aside because its magnitude is uncertain, the projected fiscal 2009 deficit as a result of policies enacted by the Congress and approved by the President will be 3.4% of GDP.

In short, the actual fiscal policies enacted by Congress and approved by the President deliver less spending restraint than they promise, and no fiscal restraint whatsoever.  The administration’s decisions point to a deficit in 2009 comparable to the one for 2004, and one that is more than twice what President Bush proposed last February.  In recent months, the president and Congress have again shown their commitments to lower taxes and to higher security spending.  As pressure to narrow the deficit increases in future years, the damage to worthwhile domestic spending programs could be substantial.

This Snapshot was written by EPI economist Max B. Sawicky and Research Director Lee Price.

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