by John M. Curtis
(310) 204-8700

Copyright January 27, 2004
All Rights Reserved.

ooking at a $477 billion budget deficit, the Congressional Budget Office now estimates that the red ink could swell to $2.4 trillion over the coming decade. Rosy forecasts about robust economic growth causing balanced budgets—or even surpluses—seem unrealistic for the foreseeable future. According to the CBO, making President Bush's tax cuts permanent could bloat deficit to $5 trillion—a figure so staggering that economists have difficulty speculating about the economic repercussions. CBO estimates attribute about at least two-thirds of the $1 trillion deficit increase to recently enacted Medicare prescription legislation. Nostalgic comparisons are often made Reagan years when supply-side economics—tax cuts—ruled the day. In 1981, President Ronald Regan promised his tax cuts would balance the budget by 1983. By 1983, Regan's deficit tripled to $200 billion, over three fold the $60 billion shortfall inherited from President Jimmy Carter.

      Reagan blamed the monkey wrench on a stubborn recession, shrinking government revenues. Bush also blames ballooning deficits on an uneven recovery and growing expenditures to fund the war on terrorism, despite an increase in government receipts. While today's deficit represents only 4.2% of the gross domestic product, as compared to 6% during 1981, federal revenues have shrunk to ratios not seen since the Truman presidency. Democrats pounced on the latest deficits to contrast prosperity during the final Clinton years, when record surpluses exceeded $200 billion. “The nation's fiscal outlook is deteriorating,” said Robert L. Bixby, executive director of the Concord Coalition, a nonpartisan budget watchdog think tank in Arlington Virginia, concerned that tax cuts caused today's record deficits. Without curbing spending, economic stimulus alone won't reverse current trends.

      Current CBO estimates indicate that federal deficits will shrink as economic prosperity improves government revenues. But those projections assume that federal spending remains frozen over the next three years. “The politically unappealing reality staring at those on Capitol Hill is that it will take a significant slowing of spending growth or new revenues, or, most likely, both to return the budget to balance,” said Maya MacGuineas, executive director for a Responsible Federal Budget, a Washington non-profit. With no end in sight in Iraq and President Bush proposing a costly new amnesty program, there's little hope that federal spending will shrink. “Make no mistake: President Bush is serious about the deficit,” said Treasury Secretary John Snow, offering no specifics about where the ax would fall. Bush would have to reduce spending from 6.9% to 2.2%.

      During Clinton's last term, an overheated stock market generated unprecedented capital gains and income taxes. Adding to government coffers, unemployment hovered around 4%, 2% lower than today. But more importantly, since the stock market crashed in March 2000, the economy shed over 2.5 million jobs, leaving government revenues unable to keep pace with spending. Bush finds himself caught between a rock and a hard place: Rescinding tax cuts would alienate his base, rob the economy of further stimulus, torpedo an improving stock market and possibly cause another recession. “The Republicans have simply not kept their part of the bargain on spending,” said William Beach, a senior fellow with the conservative Heritage Foundation, not expecting cuts during an election year. Without dramatic spending cut or a sizzling economy, White House forecasts look off-the-wall.

      Having “guns and butter” requires an acrobatic juggling act between military and domestic spending. As long as terrorism tops Bush's priority list, spending tax dollars on ambitious health care or immigration programs won't balance budgets. Even the best-case scenario can't see a booming economy pay for runaway domestic and military spending. “Deficits do matter,” said House Budget Committee Chairman Jim Nussle (R-Iowa), concerned that growth won't solve growing deficits. So far, excess government borrowing hasn't spiked interest rates that remain at 45-year lows. Deficits usurp long-term growth by forcing the government to compete in private capital markets. Current monetary policy reflects Greenspan's belief that the economy remains dangerously close to deflation or a double-dip recession. Looming deficits put a dark cloud over the country's economic future.

      Few economists predict a return to booming stock markets and bountiful employment anytime soon. Promising “guns and butter” has inherent risks, especially running whopping deficits into the foreseeable future.. Current CBO estimates about shrinking deficits don't take into account permanent tax cuts, forcing the government, in the absence of a jobs boom, to live with revenues that don't keep pace with current spending. As baby boomers retire, both lowered revenue and higher entitlements don't bode well for future budget deficits. Before the economy is driven into a ditch, the White House must reconcile its great ambitions with new fiscal realities. With federal revenues shrinking as a percentage of the GDP, spending cuts alone won't solve current budget mess. Sooner or later, something must be done to enhance government revenue including the “unthinkable”—raising taxes.

About the Author

John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.

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