NCPA - National Center for Policy Analysis

Bartlett: Budget Less Than Meets The Eye

September 8, 1997

Last week the Congressional Budget Office released its revised estimate for the deficit and the economy, incorporating the effects of the budget deal enacted in August. While the CBO report concludes that on balance the deal reduces the budget deficit, its impact is far more modest than its supporters would have us believe. The economy, rather than the budget deal, deserves most of the credit for reducing the deficit.

  • Revised economic assumptions and technical adjustments would have reduced the budget deficit from $188 billion in 2002 to just $63 billion in the absence of any budget deal at all (see figure).
  • Well over half of the reduction in the deficit in 2002 would have occurred automatically, without any action by Congress.
  • Indeed, in the short run the budget deal actually increases the deficit by more than $20 billion in 1998.
  • With the budget deal the deficit will be $57 billion; without it the deficit would have been just $35 billion.

The revised CBO projections now estimate an aggregate decline of the federal budget deficit of $2,175 billion between now and 2007. Of this, 46 percent results from higher federal revenues, 26 percent from lower spending that would have occurred even without the budget deal, and only 27 percent from the budget deal itself.

The higher revenues come mainly from faster economic growth. CBO now expects real GDP growth to be more than a full percentage point higher this year than previously estimated. And the long-run rate of growth has now been revised up by 0.4 percent per year. Of the spending that would have been lower even without the budget deal, most results from lower interest rates, which reduce the government's borrowing costs.

An important reason for the modesty of the budget deal's net reduction in the deficit is that it actually increases spending substantially for a number of programs. Between 1998 and 2007, the deal raises spending by $40 billion for children's health, $29 billion for the refunded portion of the Earned Income Tax Credit, $15 billion for Supplemental Security Income and $5.5 billion for Food Stamps and other welfare programs.

The tax cut lowers revenues by a total of $243 billion, just 1.1 percent of projected revenues between 1997 and 2007. Nevertheless, federal taxes as a share of GDP are expected to reach 19.8 percent this year, the highest level since World War II by CBO's reckoning. And even with the tax cut, they will stay above 19 percent of GDP for the foreseeable future--well above their historical level of 18 percent.

In the end, the CBO report shows that there is much less to the budget deal than its supporters would have us believe.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, September 8, 1997.


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