Bush’s budget update may show early deficit reduction

Alison Fitzgerald and Roger Runningen

Monday, July 11, 2005 | 8:59 a.m.

President George W. Bush's administration will report this week that surging tax revenue is shrinking this year's budget deficit from the record 2004 level, possibly by as much as $90 billion, giving him a shot at fulfilling his deficit reduction promise three years early.

With tax revenue running $1 billion a day ahead of the 2004 pace in late April and May, the deficit will likely decline to about $325 billion from $412 billion last year, according to the Congressional Budget Office and private forecasters such as Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Connecticut.

"An expanding economy, creating more receipts, is putting us on a very good path to deal with our deficit," Treasury Secretary John Snow said at a press conference in Calgary on July 8. "It's pretty clear now the path we are on will take us below the president's initial target."

Bush promised during his election campaign last year that he would pare the annual deficit to about 2.25 percent of the nation's gross domestic product by 2009.

As recently as February, the government was projecting the deficit would rise this year to $427 billion, or about 3.5 percent of the nation's gross domestic product. Some economists, including Mike Englund of Boulder, Colorado, research firm Action Economics LLC, now predict the shortfall will drop to 2.5 percent of GDP this year and as low as 2.0 percent next year. That would mean a deficit next year as low as about $250 billion.

Revised Estimate

Joshua Bolten, director of the White House Office of Management and Budget, will release the government's revised estimate for the fiscal 2005 budget deficit on July 13. The Bush administration's estimate likely won't be any lower than the $325 billion forecast by CBO, said Pete Davis of Davis Capital Investments. Bush's administration has a record of overestimating deficits "and I don't see any particular reason that he would deviate from that practice," Davis said.

"CBO always is more accurate, both short term and long term," said Stanley Collender, managing director in Washington of Financial Dynamics, a business-consulting firm. "OMB doesn't get credit for being right. Their job is to show the president in the best possible light."

In the first eight months of the fiscal year the deficit was $272.2 billion, down from $346.3 billion at the same time last year, the Treasury said in a June 10 report. The monthly deficit fell to $35.3 billion in May, a bigger improvement than economists expected and the smallest gap for the month since 2001. Revenue rose 32 percent, with tax receipts from individuals surging 88 percent from May 2004, the biggest jump in five years. Spending increased 5.7 percent.

"Given the pace of income, wage and salary growth, there'll be plenty of money in the coffers," said Rich Yamarone, director of research at Argus Research Corp. in New York. "I wouldn't be surprised with a $100 billion narrowing."

Deficits Since 2002

The U.S. has run deficits each fiscal year since 2002 amid increased defense spending after the September 2001 terror attacks, tax cuts and rising costs for social services such as Medicare. The government reported annual budget surpluses from 1998 to 2001.

Bush and his Republican allies can claim bragging rights for bringing the budget down in time for midterm elections, said Michael T. Darda, chief economist at MKM Partners LLC in Greenwich, Connecticut. Darda credits economic growth brought on partly by the 2003 tax cuts, which reduced the tax rate on capital gains to 15 percent from 20 percent and cut the rate on corporate dividends to 15 percent from 38.6 percent.

After the 2003 tax cuts, "that's when the economy really kicked into high gear," he said. The White House, he said, is "definitely entitled to crow a little bit. You'd think they'd do a victory lap."

Not Assured

A huge decline in the deficit next year isn't assured. One reason for the surge in tax revenue this year was a 10 percent increase in compensation in last year's fourth quarter because of large year-end bonuses, which probably won't be repeated this year, Lehman's Harris said.

There is a danger that a shrinking deficit may lessen the resolve in Congress to restrain spending, or that expenditures required by law will erase any gains. Defense spending is up because of the wars in Iraq and Afghanistan, and another supplemental war spending request is expected later this year. Congress is considering an extra $1 billion for veterans health care, Medicare expenses are rising because of an aging population, and interest rate increases are raising the government's debt costs.

Government spending rose 9.2 percent in June compared with the same month a year ago, the Congressional Budget Office said Thursday.