How Did Federal Surpluses Become Huge Deficits?

August 22, 2012

The dire economic condition has left the federal government with an enormous budget shortfall. Political parties try to blame each other for squandering the budget surplus the United States had at the turn of the century, but a recent Congressional Budget Office (CBO) report gives an objective account of how the budget surplus became a budget deficit, says Charles Blahous, a research fellow with the Hoover Institution

There are many reasons for the current budget deficit according the CBO estimates, including:

  • The projected surplus didn't take into account discretionary spending as a result of 9/11 and the subsequent military spending in Afghanistan and Iraq.
  • Mandatory spending increased in the form of Medicare prescription drug benefits, the TARP bailout and the 2009 stimulus.
  • Interest payments on debt were classified as mandatory spending measures, which added to federal spending.

However, despite claims by others, the tax cuts of 2001 and 2003 are not the reason for current budget deficit.

  • According to the data, there is only a marginal difference in the deficit with or without the tax cuts.
  • Surprisingly, had there only been the tax cuts and no further spending measures, there would have been a budget surplus.
  • According to the CBO, a main reason why the budget surplus never transpired was because of increased spending.

There are thus two opposite ways we can look at the effect of the 2001 and 20003 tax relief on our current fiscal situation:

  • Had the tax relief never been enacted but everything else happened as it has, we still would face enormous deficits today.
  • Had only the tax relief been enacted, we would still have enjoyed large and growing surpluses.

Various advocates have their own reasons for wanting the tax rates established in 2001 and 2003 to either be extended or to expire. But the CBO analysis should finally put to rest any misperception that tax cuts are the leading driver of our currently enormous budget deficits.

Source: Charles Blahous, "How Did Federal Surpluses Become Huge Deficits? (Hint: It Wasn't Because of Tax Cuts for the Rich)," Economic Policies for the 21st Century, August 20, 2012.

 

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