Budget Deficit Drop Predicted

Federal budget deficit
AP
The White House on Tuesday touted new deficit figures showing considerable improvement upon earlier administration predictions, trumpeting the news as a validation of President Bush's pro-growth tax cuts.

The deficit for budget year ending Sept. 30 will register $296 billion under a new White House estimate released Tuesday. That's much better than the $423 billion that the president predicted in February and a slight improvement over 2005.

A surge in taxes paid by corporations and the wealthy is largely responsible for the deficit drop.

"This good news is no accident," Mr. Bush said Tuesday morning. "It's the result of the hard work of the American people, and sound policies in Washington, D.C."

However, the results are less impressive when compared to the $318 billion deficit posted last fall for fiscal 2005. Despite strong revenues, the high costs of the Iraq war and Gulf Coast hurricane relief have weighed on the deficit — as have higher interest payments paid on the national debt.

Revenues are running $115 billion greater than expected earlier this year, the White House said, reflecting particularly strong growth in taxes paid on corporate profits and income taxes paid by wealthier people and small businessmen who pay taxes quarterly instead of having them withheld by employers.

"With the help of the president's successful pro-growth policies, the 2006 deficit is 30 percent lower than originally expected," said the White House report.

Taxes paid by individuals are growing at an 11 percent rate, the White House says, while corporate taxes are rising at a 19 percent rate.

The economy is estimated to grow at a 3.5 percent rate in real terms, a slight slowdown from the 5.6 percent rate of the first quarter of the year.

"We've had extraordinarily good profit growth, and when you have better profit growth than wage growth you tend to have windfall tax revenues because taxes on profits are higher than taxes on wages," said Diane Swonk, chief economist for Mesirow Financial, a Chicago-based financial services firm.

Swonk predicted that the unexpected revenue surge would ease around the end of the year as profits peak.

Mr. Bush has had few opportunities to boast about the deficit over the course of his time in office. He inherited in 2001 a surplus estimated by both White House and congressional forecasters at $5.6 trillion over the subsequent decade, and it quickly dwindled.

Those faulty estimates assumed the late-1990s revenue boom — fueled by the stock market and dot.com booms — would continue. But that bubble burst, and a recession and the Sept. 11, 2001, terrorist attacks started a flow of red ink. Several rounds of tax cuts, including Mr. Bush's signature $1.35 trillion tax cut in 2001, also contributed to the return to deficits four years ago after four years of budget surpluses.

Even before the release of the figures, critics poked at the White House figures, citing, for example, how they are at odds from Mr. Bush's original budget released in 2001, which predicted a $305 billion surplus for the current year, even after accounting for tax cuts.

"The deficit's probably going to be in the range of $300 billion and that still represents a swing of about $600 billion from what was projected in 2001," said Rep. John Spratt Jr. of South Carolina, top Democrat on the Budget Committee. "You've still got triple-digit deficits for as far as the eye can see."

Some budget experts say the steep rise in tax receipts looks more impressive than it really is since revenues are bouncing back from a three-year decline during Mr. Bush's first term, drops not seen since the Great Depression.

"The current so-called revenue surge is merely restoring revenues to where they were half a decade ago," said Robert Greenstein, executive director of the liberal-leaning Center on Budget and Policy Priorities think tank. That's after accounting for inflation and population growth.

Still, the new figures should allow the president to claim credibly that he will meet his promise, made in early 2004, that he will cut the deficit in half by the end of his second term. Then, the White House forecast the deficit to be $521 billion for the 2004 budget year, setting the goal of $260 billion by 2009.