On September 7, the Congressional Budget Office
released a report estimating that the budget deficit will equal $422 billion
in fiscal year 2004. Although this is $46 billion larger than the deficit
in 2003, the increase in the deficit is smaller than had been projected
earlier in the year, when CBO estimated the 2004 deficit would hit $477
billion. This led Vice President Cheney to declare, in referring to the
fact that the $422 billion deficit is smaller than was projected earlier,
“That’s a direct result of economic growth that came about as a result of
the tax changes that the President put through, and the Congress supported.”
Numerous Republican lawmakers and others associated with the Administration
issued similar statements, implying that economic growth has been faster
than expected. In addition, some press stories reported as fact, without
attributing it to the Vice President or other officials, the claim that the
change in estimates is due to a stronger economy.
But the Vice President’s statement is demonstrably incorrect.
This is not a matter of debate or interpretation; it is a simple matter of fact.
Overall economic growth has been equal to what CBO expected when it issued its $477 billion
deficit estimate earlier this year. Since economic growth was the same — not faster — as earlier projected,
the higher-than-expected revenues cannot have resulted from faster growth.
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Over the first three quarters of fiscal year 2004, economic equaled what CBO forecast in January.
Commerce Department data show that the real gross domestic product — the overall measure of the state of the economy — was 4.8 percent
larger in the first three quarters of this fiscal year than in the same period last year. In other words, real GDP growth equaled 4.8
percent over this period. In issuing its higher deficit estimates earlier in the year, CBO projected that the economy would grow by 4.8
percent over this period.
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CBO has marginally lowered its expectations of economic growth over the full fiscal year.
CBO now expects the economy to grow 4.6 percent over fiscal year 2004, after adjusting for inflation. (This is shown in
Appendix Table C-2 of the updated "Budget and Economic Outlook.") This growth rate is revised slightly downward from
CBO’s earlier projection of 4.7 percent growth for the fiscal year. (That projection can be found in Table E-3 of CBO’s
January "Budget and Economic Outlook").
CBO does expect that revenues will be $54
billion higher in fiscal year 2004 than it had projected earlier in the
year, and this difference accounts for virtually all of CBO’s downward
re-estimate of the 2004 deficit. But, as noted, the increased revenues are
not due to faster economic growth. In fact, it appears that part of the
increase in the revenues may be due to adverse economic developments.
Factors that help to explain the higher-than-expected revenues include the
following:
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According to CBO, the Treasury received an additional $30
billion as a result of taxpayers receiving smaller refunds and making larger
tax payments this year when they filed their 2003 income tax returns than
the Treasury had expected. This $30 billion in additional revenue comes
from 2003 tax returns; essentially none of this can be attributed to
unexpected economic growth since CBO issued its earlier forecast.
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Inflation has increased, and that tends to push up revenue
collections. Over the first three quarters of the fiscal year, inflation
has proceeded at a 3.0 percent annual pace. Last spring, CBO expected
inflation to proceed at a 1.5 percent annual pace over this period.
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High-income individuals and corporations may be receiving a greater share
of the income in the nation than previously anticipated, with ordinary
workers receiving a smaller share. The federal tax system collects a
higher percentage of income from high-income households than from typical
workers. As a result, increases in income disparities tend to
produce increased federal revenues.
Trends in tax receipts provide some evidence
that such a widening of income disparities has been occurring. So far in
2004, personal income tax receipts have been modestly higher than expected
and corporate tax revenues have enjoyed an unanticipated increase (although
they remain well below their historical norm). At the same time, payroll
tax receipts, which come disproportionately from the wages and salaries of
ordinary workers, appear to be lower than CBO had anticipated.
Income tax revenues come in higher, and payroll tax revenues lower, when
income disparities widen.
Such trends would result in higher-than-expected revenue intake. CBO
does not yet have enough data to know exactly why revenues are higher than
expected, and other factors also may help explain the revenue increase.
But faster-than-expected overall economic growth is clearly not among them.
End Notes:
Vice President Dick Cheney, quoted in Edmund L. Andrews, “Deficit
Analysis and Bush Differ: Budget Agency Calculates Smaller 5-Year
Decline,” The New York Times,
September 8, 2004, p.
A1.
