First, let's look at the political side of this fiscal blueprint. President George W. Bush has now presided over the biggest gusher of red ink in the nation's history, from a surplus of $127 billion when he entered office for fiscal 2001 to a 2004 deficit projection of $521 billion (in nominal terms, that's the sharpest plunge into deficit-spending ever, although not as a percentage of gross domestic product).
SECURITY FOCUS. Since Bush must face the voters in November, he has to provide a plan that at least purports to begin reining in the budget shortfall. So he has pledged to limit spending growth to around 4% annually to help reduce the deficit by half over five years, according to White House projections.
For fiscal 2005, Bush calls for limiting federal spending growth to 3.5% -- slower than the 4.4% projected growth in output. He proposes to accomplish this in part by terminating 65 federal programs and reducing an additional 63. At the same time, however, Bush is asking that tax cuts put in place temporarily earlier in his Presidency be made permanent, which would create huge fiscal headaches in the latter part of this decade and beyond.
Bush also wants to maintain his Administration's focus on national security, which shows up in a rising share of outlays for the military. Note, however, that incremental spending for Iraq and Afghanistan are not included in the budget, so that the overall amount spent on military outlays may fall in 2005. (see BW Online, 9/10/03, "The Neatest Thing about That $87 Billion").
ROSE-COLORED CALCULATIONS. The legerdemain continues with other provisions of the budget. The 128 programs slated for elimination or cutbacks all enjoy some degree of political support among congressional Republicans. At the same time, the tax cuts' extension seems a low-percentage outcome in the face of relentless deficits. If House Democrats and a few fiscal conservatives among Republicans resist, as seems likely, those extensions won't pass.
Without knowing how many of the targeted spending programs will be closed or reduced, it's impossible to predict what the net budgetary impact will be. Note that the 3% to 5% pace of spending growth Bush forecasts for the next six years has been matched for an extended period only once in the past 20 years -- in the 1992-99 period.
Tack on a few "cost"-saving details, like the budget's assumption of a lower jobless rate (5.6% for 2004, vs. 5.7% in the latest survey of forecasters compiled by Bloomberg), a slower pace of inflation (consumer price index up 1.4% in 2004, vs. 1.8% in the Bloomberg survey) and lower bond yields (an average yield of 4.76% on the 10-year Treasury note vs. Bloomberg's median of 4.76%), and the spending projections look a quite rosy.
NO AMT REFORM. Bush's revenue projections are at least as optimistic as those for spending. The White House expects revenue gains of 13.3% in 2005, a pace not matched even in 2000, when the capital-gains tax windfall reached its zenith. Thereafter, Team Bush projects a steady slowing in revenue growth. But the projected 8.3% gain in 2006 is still well above average -- and over twice the forecasted pace of GDP growth.
This projected 22% revenue rise in revenues in two years tops anything seen during the stock-bubble period. We at Informa Global Markets think it's quite unrealistic.
The Bush budget also whistles past the graveyard on one other knotty subject. There's no effort to reform the alternative minimum tax in 2005, something nearly everyone thinks should be done but which is likely to prove devilishly expensive. Blue smoke and mirrors, anyone? Harris is chief economist for Informa Global Markets