Mid-session Review Presents Misleading View of Nation's Finances

The White House's Office of Management and Budget recently (and belatedly) released its annual budgetary "Mid-Session Review," which attempts to put a positive spin on massive and worsening deficits, as well as the lowest level of revenue in nearly a half century.

Astonishingly the first paragraph in part reads "This Mid-Session Review reports solid progress toward cutting the deficit in half." Having read this statement, one might reasonably conclude that the deficit has begun to decline.



Alas, this is not so. Instead, our nation's economic policy has been fiscally irresponsible, and financially reckless.

The Mid-Session Review shows the federal budget running a $445 billion deficit for fiscal year 2004, up from a $375 billion deficit in 2003. But when the Social Security surplus is appropriately excluded, the current deficit will reach $600 billion, or 5.2 percent of GDP. (See chart below.) While temporary deficits can help the economy recover from a recession or allow us to invest in our future; unless significant policy changes are made, massive deficits are projected to persist.

In addition, federal revenue, at just 16.2 percent of gross domestic product is at its lowest level since 1959. It doesn't take a Ph.D. in economics to know that tax changes that lead to historically low revenues just may have something to do with the deficit.

So, things haven't gotten better, but what about the near future?

Over the period from 2004-2009, the White House projects that $1,727 billion will be added to the federal debt. Yet even these projections do not include many of the policy proposals being pushed by the president and considered by Congress, including a permanent fix of the Alternative Minimum Tax and the elimination of the estate tax for multi-millionaires. If enacted, these policies would add hundreds of billions to the deficit projections.

Okay, so the near future doesn't look good, we will grow our way out eventually, right? Well, as one might expect, there is a reason why the president's budget and the Mid-Session Review only publish data for the next 5 years rather than project for a 10-year horizon as was done by previous administrations.

The budgetary situation becomes even worse -- not better -- when looking out over the next 10 years and beyond. The chart below, derived from the president's own budget (Analytical Perspectives, pp. 192-196) demonstrates that the budget situation will deteriorate significantly over the coming decades.



With the retirement of the baby-boom generation, increases in expenditures for Social Security and Medicare will combine with massive deficits and low revenue to put an extreme squeeze on the rest of the budget. The squeeze will ultimately impact many essential governmental areas, including education funding, student loans, services for families and children, funding for parks and historic preservation, highway and transportation funding and many other programs of vital importance to the American public.

So what's to blame for the deficits? Many Americans would be surprised to learn that of all the legislation enacted since the 2001 projections were made, tax changes account for 57 percent of the increased deficit -- more than both the wars in Iraq and Afghanistan, all homeland security spending, and other spending changes combined.

By not planning for the future, recent economic policy has been irresponsible, because it shifts trillions of dollars of the tax burden to future generations, and away from those that can best afford to pay.

In addition, we have lost an important opportunity to use a budget surplus to address some of the most pressing and most difficult policy challenges, including the viability of Social Security or Medicare. According to the Tax Policy Institute, the total present value of all the revenue lost by the tax changes over the past three years would be more than enough to shore up Social Security for the next 75 years.

Finally, this kind of tax policy is extremely reckless because it threatens our ability to respond to future crises and challenges -- such as another terrorist attack on the order of 9/11 -- and if it continues, it may very well endanger the financial health and stability of the nation.

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