Krugman hits, and
hits hard.
The budget released yesterday, which projects a $521 billion deficit for fiscal 2004, is no more credible than its predecessors. When the administration promises much lower deficits in future years, remember this: two years ago it projected a fiscal 2004 deficit of only $14 billion. What's new this time is that the administration has decided to pay lip service to conservative complaints about runaway spending.
"Two years ago", incidentally, is post-9-11.
The prime cause of giant budget deficits is a plunge in the federal government's tax take, which fell from 20.9 percent of G.D.P. in fiscal 2000 to a projected 15.7 percent this year, the lowest share since 1950. About 45 percent of this plunge can be attributed to the Bush tax cuts. The rest reflects the end of the stock market bubble, the still-depressed economy and -- probably -- growing tax sheltering and evasion.
It's true that increased spending also contributes to the deficit, and that there has been a substantial increase in discretionary spending -- spending that, unlike such items as Social Security payments, isn't automatically determined by formulas. But the bulk of this increase has been related to national security.
Traditional budget measures distinguish between defense and nondefense discretionary spending. Even by these measures, defense accounts for most of the increase in recent years. But a better measure would group homeland security and other costs associated with 9/11 with defense, not domestic programs. The Center for American Progress -- confirming related work by the Center on Budget and Policy Priorities -- estimates that from 2000 to 2004 security-related discretionary spending rose to 4.7 percent of G.D.P. from 3.4 percent, while nonsecurity spending rose to only 3.4 percent from 3.1 percent.
In other words, the role of nonsecurity spending in the plunge into deficit is trivial, compared with tax cuts and security spending.
Meanwhile, those discretionary budget cuts that aren't cutting the deficit are not playing too well around the country. Check out this Google news search for "
budget cuts Bush". My favorites are "Budget cuts may include police, water" in Montana, "Bush Budget Cuts Ag" in Kansas, and "Lies, Damned Lies, and Bush's Budget" in
Business Week.
Without knowing how many of the targeted spending programs will be closed or reduced, it's impossible to predict what the net budgetary impact will be. Note that the 3% to 5% pace of spending growth Bush forecasts for the next six years has been matched for an extended period only once in the past 20 years -- in the 1992-99 period.
Tack on a few "cost"-saving details, like the budget's assumption of a lower jobless rate (5.6% for 2004, vs. 5.7% in the latest survey of forecasters compiled by Bloomberg), a slower pace of inflation (consumer price index up 1.4% in 2004, vs. 1.8% in the Bloomberg survey) and lower bond yields (an average yield of 4.76% on the 10-year Treasury note vs. Bloomberg's median of 4.76%), and the spending projections look a quite rosy [...]
Bush's revenue projections are at least as optimistic as those for spending. The White House expects revenue gains of 13.3% in 2005, a pace not matched even in 2000, when the capital-gains tax windfall reached its zenith. Thereafter, Team Bush projects a steady slowing in revenue growth. But the projected 8.3% gain in 2006 is still well above average -- and over twice the forecasted pace of GDP growth.
This projected 22% revenue rise in revenues in two years tops anything seen during the stock-bubble period.
Bush is in for a world of hurt.