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Rising Deficits -- Don't Blame the Economy

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The first rule of holes is this: If you're in one, stop digging. New government estimates released last week show that the federal government will be in a big hole in fiscal 2009: a $546 billion deficit. They also help show how we got into this hole -- and the answer may surprise you.

In January 2001, the month President Bush took office, the Congressional Budget Office released budget estimates for each of the next ten years (2002-2011). CBO predicted that the 2009 budget would show a $710 billion surplus. So the $546 billion deficit now predicted for 2009 is actually $1.3 trillion worse than CBO predicted nearly eight years ago. What caused this trillion-dollar decline?

Some people point to the economy. CBO's 2001 projections came out before the 2001 recession and the 9/11 attacks, which further slowed the economy. A weaker economy means less tax revenue, which in turn means smaller surpluses or bigger deficits. Since the 2001 projections couldn't factor these events in, it's not surprising that they proved too optimistic.

But, in fact, the economy's weaker-than-expected performance, along with other "technical" factors that are beyond policymakers' control, account for less than a fourth of the $1.3 trillion deterioration in the budget. The other three-fourths -- $1 trillion's worth -- is due to actions by the White House and Congress since 2001 -- specifically, the tax cuts and spending increases they enacted.

Put another way, even though the economy has performed less well since 2001 than CBO expected, the federal budget would still be running a projected $465 billion surplus in 2009 if policymakers had enacted no tax cuts or program increases.

Does this mean increased domestic spending is mostly to blame? That's a common claim by those seeking to shrink domestic programs, but the numbers don't support it.

It's true that Congress has expanded several entitlement programs since 2001 -- most notably by adding prescription drug coverage to Medicare. Yet these cost increases amount to only 12 percent of the $1 trillion deterioration.

And funding increases for domestic "discretionary" programs -- the programs Congress funds each year through the appropriations process, such as education, medical and scientific research, and law enforcement -- account for just 6 percent of the deterioration. Over the past six years, funding for this part of the budget has hardly grown at all in real per-capita terms.

In reality, the two main reasons why the 2009 budget will be so much worse than CBO had predicted are tax cuts and increases in military and other security-related spending.

Tax cuts alone account for 42 percent of the budgetary deterioration for 2009 that stems from policymakers' actions since 2001. Increases in military and other security programs account for another 39 percent. Combined, these two factors account for 82 percent of the budget decline that is due to policy actions.

The tax cuts -- the largest of which by far was the giant 2001 Bush tax cut -- will cost $295 billion in 2009 alone. While nearly all taxpayers will receive some tax cut, the distribution of the tax cut benefits is highly skewed. In 2009, a typical household in the $40,000-to-$50,000 income range will receive a tax cut of about $950; households with incomes over $1 million will receive tax cuts averaging $135,000.

Regarding the military and other security-related increases, it's worth noting that these reflect more than the wars in Iraq and Afghanistan. The underlying budgets of the Defense, State, and Homeland Security Departments have also gone up significantly, for reasons not directly related to operations in Iraq and Afghanistan.

The picture these new CBO figures present -- an enormous deterioration in the budget over the past eight years, caused mostly by tax cuts and security-related spending increases -- is much the same if we look not just at 2009 but at the entire ten-year period that CBO's January 2001 projections cover. In 2001, CBO predicted the federal government would amass surpluses totaling $5.6 trillion over the 2002-2011 period. Now, CBO data show a cumulative deficit of $3.8 trillion over that same period. That's a $9.4 trillion deterioration, $7.2 trillion of which was caused by policy actions. Tax cuts and security-related spending increases caused 83 percent of that.

These facts carry several important messages for the next President and Congress as they try to restore fiscal responsibility, one of which is that domestic discretionary programs shouldn't be made the scapegoat for the emergence of large deficits.

As noted, increases in domestic discretionary programs account for just 6 percent of the budgetary deterioration for 2009 caused by policymakers' actions. Moreover, some of these programs have been cut significantly in recent years (child care funding, for example, has fallen almost 17 percent since 2002, after adjusting for inflation), and some will require additional investments over the next several years to address unmet needs in areas ranging from veterans' health care to job training to the environment.

Another important message is that tax cuts cost money -- and extending all of the 2001 tax cuts past their scheduled expiration in 2010, as many conservatives favor, would cost a lot of money. Consider this: extending the tax cuts just for the top 1 percent of households, a group that today makes more than $450,000 a year, would cost more over the next 75 years than the entire Social Security shortfall.

Thus, one of the most critical domestic policy debates over the next two years will be about which of the tax cuts to extend.

And a critical part of the tax-cut debate will be to ensure that policymakers understand that tax cuts really do cost money. Some people argue, despite clear evidence to the contrary, that tax cuts pay for themselves. If we fall for that claim, we're likely to end up digging the deficit hole even deeper.

Robert Greenstein is Executive Director of the Center on Budget and Policy Priorities.