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Budget Deficits and the Economic Horizon

Let’s talk about Budget Deficits and look at the meaningful numbers. Democrats consistently attempt to attack the economy and the Budget deficit as an indication that Bush’s tax cuts are hurting “our children’s future”. Every year, someone states that "This year's budget deficit of $XXX Billion is the highest on record." But few politicians state, this year's GDP and government revenue is the highest on record also. GDP measures the entire size of the economy, so it only makes sense to discuss budget deficit as a percentage of GDP since this takes into account the overall size of the economy. This allows us to compare a relatively small economy to a large one and get a frame of reference. In order to reduce the budget deficit as a percentage of GDP, the choices are simple--grow, cut spending, or increase tax revenue (most think this means raising taxes). Some economists believe that by doing the first, you actually simultaneously accomplish the third by growing the economy, but more on that later. First, let’s look at Europe with their progressive economic policies paying particular attention to GDP growth and Deficits as a Percentage of GDP:

The expected recovery in Europe has failed to appear; quite to the contrary, economic expansion faltered and the GDP growth forecast for 2005 was 1.2 percent. For 2006, an economic expansion of 1.8 percent is projected; for Germany and Italy forecasted output growth is even more modest at 1.2 and 1.4 percent, respectively. …Long-term growth of an economy is determined by three main factors: employment, productivity growth, and capital formation. The aging European population is a big hurdle for more healthy growth rates; and rising social security spending is a burden for fiscal policy. France, Germany, Greece, Italy, and Portugal are all expected to exceed the 3 percent GDP cap stipulated by the Stability and Growth Pact.

In the US, we had a huge budget deficit outlay, yet our TAX CUTS effectively did what spending cuts could not—drastically increased growth and tax revenues which cut the deficit. As a percent of GDP, France and Germany already have larger budge deficits than the US. And the outlook does not look good. If France and Germany continue to experience the slow growth that plagues the last couple of decades and lag behind the US in terms of growth, their woes will only deepen. Their budget deficits in terms of GDP are already worse than ours. Growth, tax or revenue increases, or spending cuts are the only way to fix the problem and Europe’s high taxes, social programs, and stagnant growth are not changing any time soon.

This was from the White House several months ago before the most recent revenue report came out earlier this month revising the 2006 figures:

In last year’s Mid-Session Review, the Administration forecast a higher nominal deficit for 2006, in part reflecting the implementation on January 1, 2006 of the new Medicare prescription drug benefit. With the unanticipated spending associated with relief and recovery efforts in response to Hurricanes Katrina and Rita, the deficit is now expected to be larger than previously forecast. We now project that the 2006 deficit will come in at 3.2 percent of GDP, or $423 billion.

While this increase in the deficit is unwelcome, a deficit at this level is still well within the historical range. At 3.2 percent of GDP, it would still be smaller than the deficits in 11 of the last 25 years. More importantly, if we build on the policies of economic growth and spending restraint reflected in this Budget, the deficit is projected to return to its downward trajectory and stay on track to meet the President’s goal of cutting the deficit in half by 2009.

For 2007, the Budget forecasts a decline in the deficit to 2.6 percent of GDP, or $354 billion. By 2009, the deficit is projected to be cut by more than half from its projected peak to just 1.4 percent of GDP, which is well below the 40-year historical average deficit.

Again, note that this was before last week’s news:

WASHINGTON – A buoyant President Bush seized on newly reduced federal budget projections Tuesday as proof that his tax cuts are working, saying his previous pledge to slash the deficit in half by 2009 is being fulfilled well ahead of schedule.

Democrats pooh-poohed the figures released by the White House budget office and said that the $296 billion projected deficit for the current fiscal year would still be the fourth-highest ever.

...

“Tax relief is working, the economy is growing, revenues are up, the deficit is down,” he said.

The Bush administration projected in February that the 2006 deficit would reach $423 billion, a significant jump from the $319 billion level of last year. Budget officials attributed the lower projection of $296 billion to an unexpected surge in tax revenues to the government.

Instead of our Deficit in Terms of GDP being at 3.2%, the Bush tax cuts have already reduced that to approximately 2.4%. The GDP is growing in leaps and bounds at over 5% in the First Quarter 2006. It seems that the economic news only paints a better and better picture of a growing and vibrant economy. Too bad most Americans don’t realize how good we have it economically right now. The Democrats must have a heck of a PR machine to convince Americans with record homeownership, rising wages, and a vibrant and growing economy creating almost 4M jobs in the last three years how bad we have it. France only wishes they had this bad of an economy.

Policies Matter. Leadership Matters.

Posted by Justin B. · 14 July 2006 01:03 PM

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