- The Washington Times - Thursday, July 13, 2006

Compared to its February projections, the White House released some good news on the federal budget this week. The estimate of the fiscal 2006 budget deficit, which the administration forecast in February would total $423 billion, was revised sharply downward to $296 billion. That would represent a modest $22 billion improvement over the fiscal 2005 deficit of $318 billion and a major advance compared to the $413 billion deficit in 2004. The deficit for fiscal 2007 will rise to $339 billion, the White House also reported in its midsession budget review.

For fiscal 2006, which ends Sept. 30, tax receipts have been running much higher than the administration projected in February. Indeed, following a nearly 15 percent increase in tax receipts from 2004 to 2005, the White House projected this week that tax revenues will rise by 11 percent in 2006.

Clearly, a $296 billion deficit is much preferred over one approaching $425 billion. However, given that the economy will soon enter the sixth year of an expansion that began in November 2001, unified budget deficits in the range of $300 billion are much too high for this stage in the business cycle. In addition, it must be noted that the unified deficit includes an annual Social Security surplus of about $175 billion. Remove the Social Security surplus and the remaining on-budget deficit will average nearly $500 billion per year in fiscal 2006 and 2007. As recently as fiscal 2000, there was a unified budget surplus of nearly $250 billion and an on-budget surplus of nearly $100 billion. So, there has been a “fiscal swing” (in the wrong direction) of more than half a trillion dollars per year since 2000. From a unified surplus of 2.4 percent of GDP in 2000, America’s fiscal balance has evolved into a deficit of 2.3 percent of GDP. Additional defense and homeland security spending attributed to the global war on terror accounts for only about 30 percent of this shift. President Bush’s first budget, which envisioned $1.65 trillion in tax cuts (equaling the cumulative 10-year tax cuts passed in 2001 and 2003), projected a 2006 unified budget surplus of $300 billion.

Despite the $127 billion downward revision of the projected 2006 budget deficit (from $423 billion to $296 billion), the budget review also reported that the nation’s gross federal debt will increase by $593 billion this year (and by $623 billion in 2007 and $525 billion in 2008, when the first Baby Boomers will become eligible for Social Security).

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