| Is there more sanity in the federal budget than people think?
The latest budget numbers closing out fiscal year 2004 show slower spending growth, stronger tax receipts, and a $413 billion deficit that came in about $100 billion less than the Office of Management and Budget predicted at the start of the year and $64 billion lower than the Congressional Budget Office estimate.
Overall, according the Treasury Department, tax receipts increased 5.5 percent in fiscal year 2004, compared to a 3.8 percent decline in fiscal year 2003. Income-tax withholdings gained 2.5 percent versus a loss of 2.2 percent in the prior year. Corporate tax collections exploded 43.7 percent on the shoulders of near-record corporate profits.
What's going on? It's clear: At lower marginal tax rates, the rising economy is throwing off a lot more tax revenues. Score one for the supply-siders.
Overall budget outlays increased 6.2 percent in the recent fiscal year, which is less than last year's 7.3 percent. Excluding spending for defense and homeland security, as well as entitlements for healthcare and Social Security, federal spending increased by a very moderate 3.4 percent in fiscal year 2004. If you remove net interest, then the budget increase was only 3 percent -- just a bit higher than the inflation rate.
As a share of gross domestic product, the deficit came in at 3.5 percent. That's the same fraction of national income as last year. This deficit share of GDP is also lower than Europe's and only about one-third of Japan's. This is more than acceptable. In the early 1980s, the deficit share of the economy was over 6 percent, but that didn't stop the Reagan boom, which followed large-scale tax cuts and deregulation measures.
Believe it or not, there are still people out there who cling to the view that deficits drive up interest rates. How can they justify that when the current interest rate structure is at a 45-year low with the Treasury-bond yield around 4 percent? In fact, the 10-year note was yielding around 6 percent in 2000 when the budget was throwing off unwise and unusually high surpluses that drained the economy of private sector resources.
The point is, deficits don't drive up interest rates, and at current levels they are not damaging the economy as many pundits and politicians might lead you to believe. That said, there is certainly a strong case to be made for greater budget discipline in Washington.
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