Budget Magic

BUDGET MAGIC….A budget question from a reader:

After the SOTU, you ran a post on Bush’s claim that by holding discretionary spending increases to 4 percent, the deficit will be cut in half in 5 years, showing this is highly unlikely.

Last night on the Newshour Margaret Warner asked [CBO Director] Douglas Holtz-Eakin about this claim and he said (approximately) “in 2009 the deficit will be 2% of GDP, it is now 4%, so it is cut in half”. So apparently it boils down to what the definition of “half” is.

Many Bush supporters cite “percent of GDP” as a meaningful statistic in assessing the deficit, but is it?

Answer: Yes. In fact, percentage of GDP is probably the best way of looking at this.

But wait! A better question is, “Will Bush’s policies actually lead to the deficit being reduced to 2% of GDP?” Answer: No. Not even close. Here are the numbers from the latest CBO report:

  • This year’s deficit: $477 billion.
    As percent of GDP: 4.2%

  • 2009 “baseline” deficit: $268 billion.
    As percent of GDP: 1.8%

  • 2009 real deficit: $552 billion.
    As percent of GDP: 3.8%

So using real numbers the deficit is reduced by a whopping .4% even when calculated as a percentage of GDP. This number is based on the CBO’s own estimates of three things: (1) making the tax cuts permanent, a stated Bush policy, (2) reform of the Alternative Minimum Tax, and (3) discretionary spending rising at 4% per year.

(Note: the CBO report itself includes one deficit projection based on 2.5% growth in discretionary spending and another based on 4.8% growth in discretionary spending. My figure above is an interpolation that estimates the deficit if we assume Bush’s goal of 4% growth.)

This is a far more realistic estimate. In fact, even keeping discretionary spending to 4% is pretty unlikely, and if you use the growth rate of the past few years instead (6.9%), you can tack on another 1% or so to the deficit number.

(Fairness alert: the Bushies say the CBO number is too high because it assumes we’re going to spend $87 billion on Iraq every year. If you take that out it reduces the deficit a bit.)

Coming soon, of course, is the White House budget proposal, which will have its own deficit projections. You should expect the following smoke and mirrors:

  • Projections of higher economic growth thanks to the magic power of tax cuts.

  • Wildly unrealistic assumptions about spending restraint.

  • No mention of AMT reform.

  • Assumptions that military spending in Iraq drops to nothing in 2006 and beyond.

Whatever the assumptions, though, I predict that the deficit projection for 2009 will come in at precisely 2.1%. Amazing!

And of course the White House projections will stop at 2009, which is also mighty convenient since the real deficit problems don’t start coming until the years after that. Moral of the story: keep your hands on your wallet whenever someone from the Bush administration opens his mouth. Under any remotely realistic scenario, their policies are sending the budget deficit on a permanent trip to the moon.

POSTSCRIPT: Max has more, including a pretty chart. His conclusions, however, are not so pretty.