The Declining Deficit: An Explainer

New figures show the deficit for the budget year ending Sept. 30 will be $296 billion, instead of the $423 billion that the White House predicted in February. Ron Elving, NPR senior Washington editor, explains the deficit numbers and what they mean for the economy.

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LYNN NEARY, host:

President Bush himself announced a drop in the budget deficit today. That's a job usually left to underlings, but the president wanted to make sure the public pays attention to this news.

That's because the new figures show the deficit for the budget year ending September 30th will be $296 billion, much lower than the $423 billion deficit that the White House had predicted in February.

The president said the drop was due to the wisdom of his tax cuts, which resulted in a stronger economy. Critics point out that while it's projected to be lower, we still have a sizeable deficit.

So, are the latest numbers a good thing or a bad thing? Is a balanced budget a desirable thing? Does the budget deficit have you confused? Join the conversation. Give us a call at 800-989-8255. And joining me right now in Studio 3A, NPR's senior Washington editor, Ron Elving. Thanks so much for being with us, Ron.

RON ELVING reporting:

Good to be with you, Lynn.

NEARY: Now, why is the administration so happy about the size of this deficit?

ELVING: I would not go so far as to say the administration is happy about the size of the deficit. It is, after all, a $300 billion deficit. And it is a deficit that we have despite the fact that a few years ago, we had a surplus and we were projecting enormous surpluses for this decade. And it is, of course, the fourth or fifth year in a row that we've had such a deficit, and there's not that much real relief in sight. So there's a good deal of sobering news around this figure.

But, they have a way, they have devised a way to present this in the most positive way possible, which is, after all, what you would expect from anybody in the position the President is in, or that the budget director is in. Find the most positive way to present it as possible.

And, what they have devised is a way of comparing it against an earlier projection. Not an earlier deficit. Not an actual number, but a projection. And back in February, they projected that by the end of this fiscal year - that is by the end of September, this coming fall - we would have an annual deficit just for this one year of $423 billion. Truly an impressive figure.

So this figure now, just five months later, has dropped by 30 percent, and has dropped just under $300 billion. So it can be put forward as a $296 billion deficit, as opposed to a $300 or even $400 billion deficit. That sounds so much better than the scary story that we heard in February that it's playing - or at least the president is trying to make it play - as good news.

NEARY: Okay. And what reasons are being given for the shrinkage?

ELVING: The shrinkage is attributed to faster and richer than anticipated collections, primarily. Income tax projections have been exceeded. Corporate tax projections have been exceeded by even more. So, right now they're projecting that instead of the earlier projected figures, they're going to be up 11 percent, 15 percent - things in that range - compared to what they had expected in February. In other words, they're saying that had a better season than they anticipated. April, the big month for a lot of corporate tax money to come in, for a lot of individual tax payer money to come in. And they're just seeing a little bit more coming in from some of the people in higher incomes. That plays well, too, of course, because the administration's been criticized for lowering taxes too much on business and corporations and on wealthier Americans.

So if they can point to better collections from those very groups, that is another indication that - in their view - their policies are working. They also believe that the economy is running a little hotter than they might have previously thought it was going to. And that, they of course attribute to the policies of the last four or five years, especially the tax cuts from 2001, 2003. And if all of that is accepted at face value, then it would seem to be a success story that is so quickly reducing the deficit from this figure of 423 billion, down under 300 billion. And incidentally, the projection for next year is that it will go up again in 2007, but only by about 40 billion. And that then in 2008 - magically enough in the next presidential election year - it'll drop all the way down below $200 billion a year, all the way down to $188 billion. Hallelujah.

NEARY: Still high.

ELVING: Still high if you compare it to surplus. And then we get into the question of how high is high? This particular budget deficit is 2.3 percent of the gross domestic product. Two-point-three percent. That's a relatively low figure. In fact, it's lower than the percentage figure for the budget deficit in 17 of the last 25 years. That's pretty good.

NEARY: I hope everybody is still with us now.

ELVING: Well, I know that was a lot of numbers, Lynn, in rapid succession.

NEARY: I know people get lost sometimes when you start talking about deficits in the budget, and so…

ELVING: And percentages.

NEARY: …we called on people to send in some of their questions via e-mail, and I have a few of those e-mails here. So let me begin. This is an e-mail from Mark(ph) in Lansing, Michigan. “Could you please explain about those expenditures that are off-budget, if I used the correct term, or other spending that does not appear in the budget? How does this affect the calculations of total national debt, etc.?”

ELVING: That's an excellent question, and I'll try to give an answer without becoming too numerical.

NEARY: Okay.

ELVING: Over the years, the federal government has had on-budget and off-budget expenses. We also have something that's called the discretionary budget, and the mandatory spending budget. One of the things that are mandatory is to fulfill all of the so-called entitlement programs: social security. You don't hear many people saying we spend less money on social security. Medicare, also something of a sacred cow. These kinds of entitlements are part of the budget and are not part of the budget, depending on which way you're looking at it.

And there are also some other expenditures that are not necessarily part of the federal budget deficit in a given year, but do accumulate in the long run as part of the overall federal debt.

And let me just say - by way of explanation - the deficit is a one-year figure, whereas the federal debt is the accumulation of all federal deficits back to George Washington.

NEARY: Right. Which people get confused about. A follow-up here to that, from William in San Antonio. “Are the costs of the Iraq and Afghan wars included in the reported deficit figure, or are these off-budget items funded entirely by debt but not included in the official budget deficit numbers?”

ELVING: In the budgeting that Congress and the President do, the costs of the war are, let us say, underrepresented, and that larger amounts are then spent for Afghanistan and Iraq, and other things - emergency spending such as Hurricane Katrina - in what are called supplemental emergency appropriations bills that are not part of the regular budget.

However, that spending ultimately does become part of the revenue versus expenditure stream, so it does show up, eventually, in the federal budget deficit figures. And certainly, it's reflected in the total federal budget debt.

NEARY: Okay. I think we have time for one more question. “How much of the deficit reduction is coming from record oil profits?”

ELVING: There have been very high profits in the oil industry in recent months, and that is a contributing factor, surely, to the increased corporate tax collections. What the percentage is, I couldn't say.

NEARY: All right. Well, thanks so much for being with us today, Ron.

ELVING: My pleasure, Lynn.

NEARY: Ron Elving is NPR's senior Washington editor, and he joined me here in Studio 3A.

Coming up, your letters, and I want to remind you that you're listening to TALK OF THE NATION from NPR News.

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White House Drops Deficit Projection to $296 Billion

 The latest figures for the budget deficit are revised to $296 billion for 2006 instead of the $423

The latest figures for the budget deficit are revised to $296 billion for 2006 instead of the $423 billion that the administration had projected in February. Source: Office of Management and Budget. Doug Beach hide caption

itoggle caption Doug Beach
The White House increased its estimates for individual and corporate tax receipts from the projectio

The White House increased its estimates for individual and corporate tax receipts from the projections made earlier this year. The president said Tuesday that economic growth fueled by tax relief has sent tax revenues soaring. Doug Beach hide caption

itoggle caption Doug Beach

(AP) — President Bush touted new deficit figures Tuesday showing considerable improvement upon earlier administration predictions, saying it shows the wisdom of his tax cuts.

Bush himself announced the figures - a task that for the most part has been left to lower-ranking administration officials in the past. The new figures show the deficit for the budget year ending Sept. 30 will be $296 billion - much better than the $423 billion that Bush predicted in February and a slight improvement over 2005.

Bush said the improvement is due to tax cuts he pushed in 2001 and 2003 and his clampdown on domestic agencies funded by Congress.

"These tax cuts left nearly $1.1 trillion in the hands of American workers and families and small business owners. And they used this money to help fuel an economic resurgence that's now in its 18th quarter," Bush said. "Economic growth fueled by tax relief has sent our tax revenues soaring."

Impressive profits and big income gains by the wealthy are largely responsible for the surge in revenues and, in turn, the deficit drop.

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.

The deficit for next year would ease back up to $339 billion, the White House predicted. It would drop to $188 billion in 2008.

"The 2006 deficit may be a bit lower, but it represents a $600 billion swing from the surplus projected in 2001. And a deficit of $296 billion is still a large deficit. In nominal terms, its one of the four largest in history," said Rep. John Spratt Jr. of South Carolina, top Democrat on the Budget Committee.

"Let's not boast about a $300 billion deficit," said Senate Minority Leader Harry Reid (D-NV). "Any statistic you look at recognizes the rich in America are getting richer, the poor are getting poorer and the middle class is getting squeezed."

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.

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.

"Bold pro-growth tax policies enacted by Congress and the president have sparked unprecedented economic growth," said Senate Budget Committee Chairman Judd Gregg (R-NH).

But Gregg and budget experts across the spectrum say the real challenge lies ahead, when the retirement of the baby boomers threatens to swamp Social Security and the Medicare health plan for the aged.

For his part, Bush reiterated that Congress should enact the line-item veto to help him crack down on wasteful spending passed by Congress.

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.

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 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.

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 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 allowed Bush to claim 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. Bush's deficit-halving promise was based on 2004 estimates projecting a $521 billion deficit for the 2004 budget year, setting the goal of $260 billion.

Copyright 2006 by The Associated Press. All Rights Reserved.

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