January 7, 2004
Half the Deficit is All Spin
By Stan Collender
President Bush's fiscal 2005 budget is supposed to be sent to Congress by the first Monday in February, so over the next four weeks we're going to be hearing a great deal about how the administration plans to cut the deficit in half by 2008.
For a large number of reasons, this talk should be discounted completely.
First, the White House is not promising to cut the deficit in half from current levels but only after its tax and spending policies have increased it to $500 billion or more. That means that cutting the deficit "in half" could leave it at about $250 billion. Not only is this not a 50 percent reduction from the $374 billion deficit recorded in 2003, but compared to the $236 billion surplus recorded the year before the administration took office, a $250 billion deficit would still be a serious deterioration in the budget outlook regardless of how rosy the administration tries to make it sound.
Try to imagine the politics of this extraordinary decline if the president had said in 2001 that he not only was going to eliminate the surplus but also was going to leave the next administration almost $500 billion worse off than when he took office.
Second, the White House has refused to explain whether it means the deficit will be cut in half in nominal terms or as a percentage of the economy. This distinction is quite important. Unless revenues start to flow to the Treasury much faster than they are currently expected to do, cutting the deficit in half in nominal terms -- from $500 billion to $250 billion, for example -- will require actual spending reductions or revenue increases. That, of course, would have a significant impact on federal policies and be politically painful.
But cutting the deficit in half as a percentage of GDP could be accomplished without significant changes if the economy is assumed to grow substantially over this same period.
The budgets submitted by every president always assume that the economy will grow. So, in what could be a brilliant election-year ploy, by making its economic forecasts more optimistic, the Bush administration may be able to make it appear that it will achieve what it is promising without having to anger anyone or take any political heat for it. But if federal spending and taxing policies remain unchanged, the long-term budget outlook will not have been improved as much as the White House will be claiming.
This has been tried before. In the early years of the Reagan administration, Office of Management and Budget Director David Stockman and Council of Economic Advisors Chairman Murray Weidenbaum came up with an economic forecast that was very optimistic, widely derided and ultimately inaccurate. In the interim, however, it allowed the administration to project smaller deficits.
Third, cutting the deficit in half by 2008 really means that the administration will merely be projecting what will happen four years from now based on the continuation of current policies. But in many cases, the current policies have already been abandoned. At the same time that it has been touting the deficit-reduction powers of the assumptions in place, the White House has been considering additional tax cuts and making the already-enacted tax cuts permanent. Then there are the near-certain additional expenditures for activities in Iraq, which have not been factored into the cutting-the-deficit-in-half calculation.
Fourth, even if the budget does not assume it, something unexpected is likely to happen that will cost more than anyone either is currently expecting or willing to admit. There will almost certainly be one or more hurricanes, floods, tornadoes or earthquakes between now and 2008 that will require more funds than anyone is currently assuming. Unfortunately, there is also likely to be at least one manmade disaster such as a war, terrorist situation or economic problem that requires some type of federal response.
The past few weeks are a good example of what could happen. When will the unnaturally warm weather on the East Coast prompt ski resort operators to start asking for federal assistance? Does anyone really think that the White House won't propose additional spending for meat inspections given the current Mad Cow situation? If the terrorism alert remains at its current heightened state, won't state and local governments have to be given some additional federal assistance?
Fifth, even if the administration sends a budget to Capitol Hill that shows the deficit falling as the administration is promising, much of that is likely to be based on proposed spending cuts that Congress is unlikely to accept. Especially in an election year when the majorities in both houses are narrow, proposed spending cuts are likely to be ignored.
If this happens, the administration might claim it is not to blame because its pledge was broken by Congress. But with both houses under Republican control and a presidential veto not likely to be overridden, the White House should be held responsible for the ultimate outcome rather than only its pledge. That means Bush should not get credit for unrealistic spending cuts and policies that his House and Senate allies refuse to accept.
Sixth, if recent administration spin on other budget issues is any indication, the White House may very well try to exclude the impact of additional "emergency" or "supplemental" spending from the deficit calculation. It may, for example, say that the deficit was cut in half not including the additional costs for the war in Iraq, terrorism, etc. That would be a ridiculous claim, and an important qualification to its current position that should not be allowed to be made.
Finally, and most important, the pledge to cut the red ink in half by 2008 doesn't say anything about whether a $250 billion deficit will be the appropriate fiscal policy at that time. If the administration gets the continuous economic growth it is promising over the next four years, it is possible and perhaps even likely that a $250 billion deficit will be far too high. The converse is also true; a $250 billion deficit in 2008 could be too low if the economy is not growing.
That is why simply saying the deficit will be cut in half by 2008 makes no sense from an economic perspective. The fact that the administration is saying it under these circumstances should make everyone realize that it is doing so for a completely different reason.
Question Of The Week
This year it's going to be much easier for you to brag about being selected as the winner of a question of the week. Instead of a T-shirt that you can't wear at work, a coffee mug that one of your colleagues swipes from the dishwasher before you arrive or a mouse pad that can't really be seen from the other side of your desk, this year's winners will receive a large "I Won A 2004 Budget Battle" pennant that they can proudly hang in their office for all to see... and comment on.
This Week's Question. As far as the federal budget goes, the deficit, the economy, the long election-year inspired recesses, etc., are all likely to make it a year to remember, so referring to it simply as "The fiscal 2005 budget debate" just doesn't seem adequate. The question: What is the most appropriate name for the yearlong budget debate that is about to begin? For example, should we do what the Chinese do and name it after some animal ("The Year of the Rabbit" because the deficit keeps multiplying)? Or should it be named after some movie (Such as Mel Gibson's "The Year of Living Dangerously")?Click here to send in your response, which must be received by 5 p.m. PST on Saturday, Jan. 10, 2004. You must include a mailing address so we can send you the all new "I Won A 2004 Budget Battle" pennant if you win. Note to government employees: Because of security procedures at many offices and facilities, your home address will be the best way to make sure the pennant actually gets to you.
"Federal Budget Game Show" Briefing Set For Jan. 28
Will the budget debate look like an episode of "The Gong Show"? Will the tax-and-spending decisions put the economy in "Jeopardy"? Will the Republican leadership look like they're playing "Let's Make A Deal" as they search for votes on key issues? And will Congress and the White House be able to "Beat The Clock" and get all of the appropriations enacted by the start of the fiscal year?
Find out on Jan. 28, when National Journal, Government Executive and Fleishman-Hillard team up just as the fiscal 2005 budget debate is about to begin to present the latest in their annual series of half-day executive briefings on what you should expect. This briefing -- "The FY05 Federal Budget Game Show" -- will be conducted by "Budget Battles" columnist Stan Collender in his usual informative and highly entertaining style and will be held at the National Press Club in Washington the week before the Bush fiscal 2005 budget is released.
Tune in... or rather... find out what is likely to happen to your program, provision, agency or department on Jan. 28 by attending the briefing. Who knows? You might even go home with some nice parting gifts.
Substantial discounts are available for registrations received by Jan. 15 and for groups of more than four. For the full agenda and registration information go tonationaljournal.com/budgetconference/.