Slashed Deficit Great Fortune for Economy

The budget deficit, despite the gloomy forecasts of a fiscal meltdown in last year’s campaigns, is falling sharply as a result of increasing tax revenues from stronger economic growth. Period.

This is just what tax-cutting supply-siders, and this columnist, predicted would happen. Cut the tax burden on workers, businesses and capital, and the surge of growth that will follow will eat into the deficits and, with a slowdown in spending, gradually turn into surpluses.

Last week, the U.S. Treasury reported a surge in revenues before the April 15 tax deadline that resulted in a $54 billion gain that has pushed this fiscal year’s April-June third quarter into surplus territory.

There will no doubt be revenue ups and downs in the final months of this 2005 fiscal year, which ends Sept. 30, but it appears right now that the deficit is in a downward trajectory.

We hit a record $412 billion deficit in the 2004 fiscal year, up from $378 billion in 2003 and $158 billion in 2002. Four months ago, administration officials were forecasting a $427 billion deficit for this year.

As a result of Treasury’s latest surplus figures, Wall Street analysts are now projecting that this year’s deficit will be around $370 billion, possibly as low as $365 billion, maybe lower if economic growth picks up later this year.

Don’t get me wrong. This is still a huge deficit in nominal dollars, though not as large as the deficits in the ’80s as a percentage of the overall size of our economy, which was about $6-to-$7 trillion back then. Today, the deficit is relatively more manageable in a much bigger $11 trillion-a-year economy that is growing faster than any of the world’s major industrialized nations.

This is why business economists now think that the government’s deficit picture is definitely improving. “I think it has turned the corner,” Standard & Poor’s chief economist, David Wyss, told The Washington Post. “My guess is 2004 will have been the worst year.”

News reports credited the turnaround to higher-than-expected tax bills, much of it from higher capital gains and the alternative minimum tax that is aimed at squeezing more money from wealthier taxpayers but is instead hitting rising middle-class incomes, too.

But the biggest overall factor in the government’s improving financial health is an economy that was growing by more than 4 percent last year, as businesses boosted earnings, the national jobless rate fell to 5.2 percent, and the stock market inched back to the 11,000 point mark on the Dow.

Last year’s election year spending bill, which tightened up nondefense, non-homeland security discretionary spending, helped, too.

All of this has given the government much more revenue to pay its bills and its debts. Treasury officials happily announced last week that instead of having to borrow $12 billion as they had previously planned, they will be able to pay down $42 billion in federal debt.

Will the deficit keep falling? I think it will because of several longer-term trends. With the 2004 elections behind them, the Bush administration and Congress are getting tougher on the budget. Spending growth is going to slow even more next year and very likely for the remainder of Bush’s last term.

Despite the pessimists, who see a weakening economy, I think we are in a continuing growth pattern, both nationally and globally that will result in higher tax revenues for the foreseeable future. The reasons are all in the economic fundamentals: lower tax rates, historically low interest rates, a hot housing market that remains robust, an oversold stock market that is headed up over the long-term, and the prospect of increasing exports as a result of lower trade barriers in the years to come.

There’s an important lesson to be learned from the fed’s declining deficit figures and it is this. An expanding economy is the only way to shrink the deficit, and lower tax rates spur faster economic growth. That is what led to last week’s lower deficit projections and a temporary surplus in revenues.

Another lesson: Don’t listen to the pessimists who wrongly predicted a fiscal and economic disaster from the deficits that never materialized. The deficits were largely the result of the war on terrorism costs that followed the Sept. 11 attacks and the economic dislocations that followed that sharply cut federal and state tax revenues.

As any business knows, when costs rise and revenues fall, you end up with a loss or deficit. We recovered relatively quickly from all that, thanks to hard working Americans and a resilient economy. Interest rates did not soar as some predicted. The economy did not get worse, as others said it would. Unemployment did not climb, it fell, and the American economy got back on track.

Last week’s budget numbers showed that the Democratic pessimists of 2004 were wrong, again.