Economy up, deficit down

The budget deficit, despite the 2004 election campaign’s gloomy forecasts of a fiscal meltdown, is falling sharply due to increasing tax revenues from stronger economic growth. Period.

This is just what tax-cutting supply-siders, and this columnist, predicted: Cut the tax burden on workers, businesses and capital, and the surge of growth that will follow will eat into the deficits and, with a slowdown in spending, gradually turn into surpluses.

Last week, the U.S. Treasury reported a surge in revenues before the April 15 tax deadline that resulted in a $54 billion gain that has pushed this fiscal year’s April-June third quarter into surplus territory.

There will no doubt be revenue ups and downs in the final months of this 2005 fiscal year, which ends Sept. 30, but it appears right now the deficit is in a downward trajectory.

We hit a record $412 billion deficit in the 2004 fiscal year, up from $378 billion in 2003 and $158 billion in 2002. Four months ago, administration officials forecast a $427 billion deficit for this year.

As a result of Treasury’s latest surplus figures, Wall Street analysts now project this year’s deficit will be around $370 billion, possibly as low as $365 billion, maybe lower if economic growth picks up later this year.

Don’t get me wrong. This is still a huge deficit in nominal dollars, though not as large as the 1980s deficits as a percentage of the overall size of our economy, which was about $6 trillion to $7 trillion back then. Today, the deficit is relatively more manageable in a much bigger $11 trillion per year economy growing faster than any of the world’s major industrialized nations.

This is why business economists now think the government’s deficit picture is definitely improving. “I think it has turned the corner,” Standard & Poor’s chief economist, David Wyss, told The Washington Post. “My guess is 2004 will have been the worst year.”

News reports credited the turnaround to higher-than-expected tax bills, much of it from higher capital gains and the alternative minimum tax aimed at squeezing more money from wealthier taxpayers but instead hitting rising middle-class incomes, too.

But the biggest overall factor in the government’s improving financial health is an economy that grew more than 4 percent last year, as businesses boosted earnings, the national jobless rate fell to 5.2 percent, and the stock market inched back to the 11,000-point mark on the Dow.

Last year’s election year spending bill, which tightened nondefense, non-homeland security discretionary spending, helped, too.

All this has given the government much more revenue to pay its bills and its debts. Treasury officials happily announced last week that instead borrowing $12 billion as previously planned, they will be able to pay down $42 billion in federal debt.

Will the deficit keep falling? I think it will because of several longer-term trends. With the 2004 elections behind them, the Bush administration and Congress are getting tougher on the budget. Spending growth will slow even more next year and very likely for the remainder of President Bush’s last term.

Despite the pessimists, who see a weakening economy, I think we are in a continuing growth pattern, both nationally and globally that will increase tax revenues for the foreseeable future. The reasons are all in the economic fundamentals: lower tax rates, historically low interest rates, a hot housing market that remains robust, an oversold stock market headed up over the long-term, and the prospect of increasing exports as a result of lower trade barriers in the years to come.

There’s an important lesson to be learned from the fed’s declining deficit figures: An expanding economy is the only way to shrink the deficit, and lower tax rates spur faster economic growth. That is what led to last week’s lower deficit projections and a temporary surplus in revenues.

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