Saturday, April 15, 2006

Budget Deficit Projected to Reach Near-Record for 2006

Blaming the costs incurred in the rebuilding of the Southeast from Hurricane Katrina as well as the budget drain from the Global War on Terror, the Bush Administration announced this week that the federal budget deficit for 2006 would reach an estimated $423 billion, close to the record set in 2004 of $433 billion dollars and considerably higher than estimates made as recently as early last month by both the White House and the Congressional Budget Office that the budget deficit would be considerably less. Bush Administration officials had maintained that they would be able to halve the current level of red ink by 2009, a goal that appears substantially more unattainable with the latest admission that federal revenues continue to lag far behind expenses. As recently as March 3 of this year, the Congressional Budget Office was projecting a notably lower federal budget deficit for fiscal 2006: the baseline deficit for all of 2006 was projected at that time as $336 billion, but it was then revised to $371 billion in line with the President's budget projections. Adding to the evidence that federal revenues are severely and unexpectedly lagging behind expenditures, Reuters is reporting that, contrary to Wall Street economists' expectations that federal revenues would fall short of expenditures in March by about $73 billion, in actuality the deficit for March hit almost $85.5 billion, following on the heels of a record shortfall of $119.20 billion for February.

In an effort to downplay the dramatic loss of budget discipline during the past five-plus years of Republican control of the Executive and Legislative Branches of the federal government, U.S. Treasury Secretary John Snow in December of last year claimed that the budget surpluses in the final years of the Administration of President George W. Bush's predecessor, Bill Clinton, were a "mirage," pointing to allegedly "anomalous" tax revenues in the final years of the 20th Century. The numbers tell a far different story, however: the gap between expenditures and revenues had been closing throughout the Clinton Administration, ultimately culminating in revenues exceeding expenditures in both 1999 and 2000. The surplus immediately fell in 2001, and went into deficit territory the next year—where it had been for Clinton's predecessors—then growing progressively more negative every year until 2005, when the deficit shrank somewhat. With the 2006 estimate, the mounting red ink has resumed its spiral. The graphic below is a revision of one published at The Dark Wraith Forums last December based upon federal budget figures through 2004. The graphic below updates the depiction with current data and projections provided by the Congressional Budget Office.

The fiscal discipline of the Clinton Administration is starkly evident in contrast to that of both the prededing and the successor Administrations. The surpluses of the final years of the Clinton Administration were the culmination of a long-term effort to clear out the deficits that had been the legacies of both Ronald Reagan and George H.W. Bush. Strikingly, as soon as the second Bush Administration took office in 2001, the hard-won gains began to vanish, and by the second fiscal budget of George W. Bush, the deficits had returned. Three rounds of tax cuts by the Republicans in Bush's first term correlate strikingly with the clear shortfall of federal tax revenues against expenditures; and in the face of what is now projected to be a near-record budget deficit for the current year, Mr. Bush is calling for making permanent the tax cuts of his first term. The graphic below focuses the previous graphic on the federal budget surpluses and deficits during the Clinton and Bush Administrations, overlaying each with its associated trendline.

Using aligned years for each Administration's budgets, the trendline for the federal budget deficits and surpluses of the Clinton Administration has a slope of approximately $69.9 billion, meaning that revenues were growing faster than expenditures by an average rate of almost seventy billion additional dollars per year during the years 1993 to 2000. The trendline for the federal budget surpluses and deficits of the Bush Administration has a slope of —$93.5 billion, meaning that expenditures have been outstripping revenues at an average rate of more than ninety-three billion additional dollars per year during the years 2001 to 2006 (with the last budget deficit as currently forecast).

The graphic at left shows the top personal marginal tax rates for the years 1993 to 2006. The three rounds of tax cuts during the first term of the Administration of President Bush are evident. After years of holding steady at 39.6 percent, the marginal tax rate paid on ordinary income by the wealthiest Americans began to slide precipitously shortly after Mr. Bush assumed office and continued to decline with successive rounds of tax cuts until the rate settled at its current level of 35 percent. In addition to the benefit of these tax rate reductions on ordinary income, taxes at the federal level on other sources of income declined, as well. As far as only the top marginal tax rates are concerned, though, for the period from 1993 to 2006 the simple correlation coëfficient between the top marginal tax bracket and the budget surplus/deficit equals 0.754. The square of the Pearson product moment correlation coëfficient for the period under consideration equals a striking 0.574. This Pearson coëfficient is frequently called "r-squared"; in the present analysis, the derived value means that well over half of the variation in federal budget deficits and surpluses over the past 14 years can be explained by changes in the top marginal tax rate on ordinary income, and all of those changes occurred during the Bush Administration, when the Republican Party controlled the White House and both houses of Congress.

The Republicans have no one to blame but themselves for the budget deficits that they, and they alone, have created. Under the Clinton Administration, the United States had recovered from the legacy of budget deficits left by Ronald Reagan and George H.W. Bush; and despite continuing claims on the White House Website with sub-titles such as "The President's Tax Relief Has Helped Spur America's Economic Momentum," the mounting budget deficits have left the United States once again falling deeper and deeper into debt, with a troublingly large proportion of the on-going shortfall being covered by foreign interests: as of the end of 2005, the external debt of the United States stood at $9.56 trillion.

If any hope can be found in this multi-year federal budget catastrophe, it is in the growing possibility that the scandals now engulfing the Bush Administration and its Republican allies in Congress will lead to a voter backlash at the polls in November of this year, at which time the Democrats could return to power in both the House of Representatives and in the Senate. Although the prospects for subsequent impeachment of President Bush and Vice President Cheney are rather remote, the American electorate will have the opportunity in November of 2008 to remove from the White House the fiscally reckless Republicans and replace them with Democrats who can once again, as they did in the 1990s, rescue the nation from the consequences that are the consistent legacy of Republican Administrations.

The Dark Wraith will share with many other Americans the hope that our collective handbasket will not have reached its destination before that glad time arrives.

This article is cross-posted from The Dark Wraith Forums.

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