- The Washington Times - Friday, February 16, 2007

President Bush recently unveiled his budget for fiscal 2008, the next to last budget year in his presidency. (Fiscal 2009 will be in its fourth month when Mr. Bush leaves office.) Fiscal 2008, which begins in October, will comprise most of the seventh year of the current business expansion, assuming the economy does not dip into recession before October 2008. Analogously, President Clinton’s next to last budget, fiscal 2000, occurred at the top of a very long expansion. With the important caveat that Mr. Bush’s 2008 budget is a proposal based on economic projections and political assumptions, it would nonetheless be interesting to see how the 2008 budget differs from fiscal 2000.

The 2000 budget had outlays totaling 18.4 percent of gross domestic product (GDP), while 2008 outlays are projected to be 20 percent of GDP. Tax revenues totaled 20.9 percent of GDP in 2000, reflecting a huge windfall in capital-gains receipts from a record-setting stock market and large tax payments from high-income earners paying the top individual rate of 39.6 percent. The 2008 budget forecasts tax receipts to be 18.3 percent of GDP.

Thus, spending will be 1.6 percent of GDP higher in 2008 than in 2000; and 2008 revenues will be 2.6 percent of GDP lower in 2008 than in 2000. As a result, there is projected to be a budget deficit of about 1.7 percent of GDP in 2008, compared to a unified budget surplus of roughly 2.5 percent of GDP eight years earlier. That reflects a fiscal-balance deterioration of 4.2 percent of GDP, or the equivalent of more than $600 billion in 2008.

We can also compare 2000 and 2008 by looking at how revenues and outlays are forecast to change after adjusting for inflation. First, however, it is interesting to note that total real (i.e., inflation-adjusted) revenues (measured in constant 2000 dollars) did not return to their 2000 level ($2.03 trillion) until 2006 ($2.04 trillion), despite the fact that real GDP in fiscal 2006 ($11.33 trillion) was 16 percent higher than real GDP in 2000 ($9.76 trillion). Meanwhile, over the same six-year period, real budget outlays increased more than 25 percent. (Over that six-year period, increased defense spending accounted for only about a quarter of that total increase in outlays.)

By 2008, when real GDP will likely be nearly 23 percent higher than 2000 GDP, real revenues are projected to be $2.15 trillion (about 6 percent above the 2000 level). Real outlays in 2008 are forecast to total $2.34 trillion (nearly a third above 2000’s total of $1.79 trillion). With budget outlays growing about 35 percent faster than GDP between 2000 and 2008 and with GDP growing nearly four times as fast as tax receipts over the same period, there should be little wonder that America’s fiscal situation will have deteriorated by more than 4 percentage points of GDP over eight years.



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