Commentary: Deficits as Far as the Eye Can See
By Howard Gleckman
In the Nineties, Washington reaped the benefits of the economic boom. Tax revenues flooded federal coffers, deficits disappeared. But new estimates of this year's anemic tax take suggest those days may not return anytime soon. Revenues could fall $30 billion to $70 billion below forecasts, which could push the 2002 deficit to $100 billion.
What happened? Capital gains shrank as stocks and mutual funds plunged. Bonuses vanished, options went underwater, profits disappeared. And although many pols insist, with the economy growing 5.8% in the first quarter, that deficits are merely a temporary, cyclical problem, don't bet on it. America may be in for another long run of red ink.
Although revenues will snap back, it would take a return to 20% annual stock market growth and 4%-plus increases in gross domestic product to put collections back on a late '90s track. Can that be done? Possibly, but it is hard to see. And the budget already assumes annual growth of 3.2% through 2008.
Even if revenues rebound, the budget must absorb extra spending for everything from the war on terrorism to Medicare. Toss in new tax cuts, and the outlook is unnerving: President Bush may be looking at deficits for the rest of his first term and well into a second term, assuming he's still in office. So Bush faces a painful choice: roll back spending and tax cuts or accept persistent deficits. "The trajectory is simply not sustainable," says Brookings Institution economist Peter R. Orszag.
Such deficits don't necessarily mean economic Armageddon. At less than 1% of GDP, a $100 billion deficit is unlikely to cause the debilitating rate hikes predicted by former Treasury Secretary Robert E. Rubin. But a budget shortfall could cripple the Bush agenda. It makes it tougher to fix Social Security, and it could scramble his plans for more tax cuts. Similarly, Democratic hopes for a big Medicare drug benefit may fade.
The return of deficits could discipline spendthrift and tax-cut-happy pols. But the political culture is leaning toward ever-more-expensive ways to buy votes. One recent example: a costly new farm bill. The tax shortfall "should be a yellow light," says Robert Bixby, executive director of the Concord Coalition, a Washington antideficit group. "Unfortunately, some people look at a yellow light and speed up."
To see how we got into this mess, it helps to look at the numbers. In March, the Congressional Budget Office predicted deficits of $46 billion in 2002, $40 billion in '03, and a surplus of $26 billion in '04--the last year of Bush's current term. The CBO saw surpluses rising to $223 billion from '05 through '08. The surplus from '02 through '08, when a second Bush term would end: $592 billion.
That won't happen. Assume a $50 billion revenue shortfall this year. Now, add some spending. For the military, Bush wants $300 billion more than the CBO projected through 2007. And his request includes only $10 billion for the war on terrorism. A realistic estimate for defense hikes through 2008: $450 billion--without a war with Iraq.
The Brookings Institution figures that homeland security will cost Washington up to $10 billion a year, on top of the $38 billion Bush wants for 2003. That farm bill will cost $73 billion. And Medicare costs are rising far faster than the White House projected. Finally, there are tax cuts. Energy subsidies could cost $25 billion. Keeping 30 million Americans from getting hit by the Alternative Minimum Tax will cost an additional $100 billion by 2008. Add it all up, and that $592 billion cumulative surplus becomes at least a $200 billion deficit.
For now, deficit politics has been shoved to the background. With an eye to midterm elections, politicians are busily spending and cutting taxes. But unless a roaring economy comes to the rescue, the country may find itself again confronting deficits for the foreseeable future.
Gleckman covers fiscal policy from Washington.