WASHINGTON -- There is some very good news in the battle to slay the budget deficit. It is being cut in half well ahead of forecasts, offering fresh evidence that reducing federal tax rates does not undermine government revenues. The Bush administration has a lot of problems on its plate, both foreign and domestic, but the budget deficit is not one of them. This is one area where President Bush's policies have been a resounding success, though don't expect to see this reported on the nightly network news shows.
The Office of Management and Budget announced last week that the annual deficit, estimated at $400 billion just a few years ago, will be $205 billion by the end of this fiscal year (which ends in September).
That's still a lot of money in a nearly $3 trillion-a-year budget, but it is 1.5 percent of the gross domestic product (the measure of everything that our economy produces each year) and it's racing downward.
The latest forecast represents a $43 billion decline from last year's deficit, which has been shrinking for three years in a row.
The administration says it is solidly on track to balance the budget in five years when it will turn into a $33 billion budget surplus by 2012. But I think OMB is much too conservative in its timeline projections. If the economy continues to perform well, as I think it will, and the president keeps the lid on federal spending, as he plans to do, we will likely reach a surplus well before 2012.
Meantime, there are valuable lessons to be learned from these latest budget projections -- especially by the gloom-and-doomers who predicted the tax cuts would plunge the government into unending deficits from which we would never recover -- sacking the economy and worsening unemployment.
These are the same people who said President Kennedy's tax-rate cuts would lead to years of red ink and all sorts of economic dislocations when, in fact, they led to a budget surplus by 1969 and a much stronger economy.The same people said President Reagan's tax cuts would wreak havoc with the government's fiscal solvency, weaken the economy and worsen inflation. But the economy came roaring back after the worst recession since the Great Depression, inflation abated, the deficit eventually began to come down and we ended up with budget surpluses in the 1990s.
And the same people said Bush's tax cuts would produce a long-term fiscal disaster and deficits as far as the eye could see. In fact, the well-timed tax cuts pulled the U.S. economy out of its sharp decline in the aftermath of the 9/11 terrorist attacks, and the resulting economic growth they triggered has produced steadily rising tax revenues that have steadily eaten into the deficit year after year.
As OMB correctly reported last week, "A growing economy delivered higher-than-expected tax receipts." The people who said that would not happen have been strangely silent ever since, because the results are irrefutable. A resurgent economy has been expanding for 22 consecutive quarters with a growth rate (GDP) that has averaged 2.9 percent a year since Bush came into office. "On an inflation-adjusted basis, the economy is now more than 16 percent larger than in 2001," OMB reported.
Will that growth rate continue, producing ever-higher tax revenues for the government to pay its bills? The administration's economists think so, projecting that GDP growth will continue to average 3 percent a year from 2008 to 2012.
While the overall economy produces this growth, it's the workers who pay the bulk of the tax receipts out of their paychecks, and more money is pouring into the U.S. Treasury because more people are working.
Here's a startling fact that puts these numbers into sharper perspective: The economy has had the longest stretch of nonstop job-creation growth since June 1990.
That's why federal tax receipts have risen by more than 37 percent over the past three years and will grow by an additional 7 percent this year.
That said, it could be dangerous to focus solely on the deficit at the expense of economic growth. The Democratic majority in Congress, feigning concern about the deficit, has proposed more than $200 billion in additional spending over the next five years and huge tax increases that will include letting parts of the Bush tax cuts expire in 2010.
That would eliminate some of the strategic tax cuts that in turn would eliminate incentives to invest, slow down the economy's engine of growth and enlarge the deficits.
Bush, sharpening his little-used veto pen, has sent word to Capitol Hill that "this isn't going to happen on my watch."