Tuesday, February 06, 2007

Budget Battle 08

I found it rather amusing yesterday how the Democrats in Congress were falling all over each other to get before the cameras to call the President's budget, which calls for the extension of his tax cuts and the slowing of spending to reduce, "dead on arrival" by pointing out how the bill is too expensive and will only raise the deficits even more. Even more interesting is how theDems are real quick to say that they're for the troops and giving them all supplies and arms they need but become apoplectic when the President submits a request for increasing the Pentagon's budget. Now I know that the Democrats are just posturing before the cameras to show their base that they're "sticking it" to George W. Bush but I'd think that they'd a least read some of the budget before the jump to any conclusions. Thankfully, the WSJ editorial board has taken some time out of their day to look into the President's budget and have found some interesting information that shows the budget in far better light than what the press and the Democrats are trying to do. Here's a look at what the WSJ had to say about the President's budget:

The news Mr. Conrad won't broadcast is that over the past three years the federal deficit has shrunk by 58%. The Congressional Budget Office -- not the White House -- is estimating that the current year's deficit (for fiscal 2007) will fall to $172 billion. That's not bad given continuing Katrina relief spending, $30 billion for homeland security, and a couple hundred billion or so to fight the war on terror.

The White House is projecting that its new budget will eliminate the deficit by 2012 assuming Mr. Bush's tax cuts are extended after 2010. We don't put much stock in future budget forecasts because they depend on so many variables. But even CBO predicts the deficit should remain near or below 1% of GDP for the rest of the Bush Presidency. That's well below the 40-year average of 2.4% of GDP.

This also means that the federal debt burden will continue to fall. Alarmists point to the $1.4 trillion rise in total federal debt from 2003-2006, but that amount is dwarfed by the $14 trillion in new household wealth created over the same period. And for all the international scolding of an allegedly profligate America, U.S. federal debt as a share of GDP is falling again (see the top chart nearby). At 37% in 2006 and heading south, the U.S. figure compares to 52% in Germany, 43% in France, and 79% in Japan. Once again rising total "debt" is a scare word used to justify higher taxes.

The real game to watch isn't debt or deficits but spending. Here, too, Mr. Bush has an improved track record in his second term. From 2001-2005, outlays ballooned by $609 billion, or 33%, and Mr. Bush never did veto a spending bill. By contrast, on current pace his second term outlays will grow by 21% -- hardly tightfisted, but a third slower.

The other news you won't often hear concerns the soaring tax revenues in the wake of the 2003 supply-side tax cuts. Tax collections have risen by $757 billion, among the largest revenue gushers in history. Receipts, especially from high-income individuals and corporations, have been growing for some two years at nearly twice the rate of spending, which explains the falling deficit. Economic growth is always the key to eliminating red ink, which is why keeping this 63-month expansion rolling needs to be the main domestic priority. This requires making those lower 2003 tax rates permanent, rather than letting them expire in 2010 and socking the economy with the biggest tax increase in history.

The more immediate budget brawl between Mr. Bush and Democrats will be how to divide that mere $2.9 trillion between guns and butter. Mr. Bush wants $245 billion more for Iraq and Afghanistan for 2007 and 2008. His overall Pentagon request of $606 billion in 2008 has been lambasted by Speaker Nancy Pelosi as a "huge number" and Democrats are moaning that their cherished social programs will suffer.

In fact, Mr. Bush's request would only bring defense outlays to 4.2% of GDP, or about 20% of total federal spending. That compares to 4.7% of GDP even under Jimmy Carter, and 6.2% of GDP in 1986 at the peak of the Reagan defense buildup (see bottom chart). Budgets are about setting priorities, and if Democrats agree that defeating terrorism is vital they will put it ahead of funding the National Endowment for the Arts.

The Democrats might think that the can bad mouth the President's fiscal policy is they want but a least he's willing to keep spending at a modest to lower level than what they're offering up to the American people. It'll be fun watching the Democrats try to explain to the American people why they're so willing to do away growth enhancing tax cuts and a much needed boost to the Pentagon being pushed forward by the President. For politicos like me, the upcoming budget fight will be very interesting.

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