NCPA - National Center for Policy Analysis

Where The Surplus Went

February 6, 2002

Fiscal forecasting is fraught with difficulties. Margins of error of 50 percent or greater are typical. That's why no one should be surprised by wild swings in federal budget projections issued by the Congressional Budget Office (CBO). The CBO now projects a deficit of $21 billion for fiscal year 2002, contrasting sharply with its projection a year earlier that the federal government would run a $313 billion surplus.

Opponents of last year's tax cuts claimed that they were the biggest reason for the shrinking surplus. But technical and economic adjustments historically have accounted for more than 60 percent of year-to-year revisions in the forecasts, and that was the case for 2002.

  • 72.7 percent, or $242 billion, of the change was due to the technical and economic adjustments.
  • 15.9 percent, or $53 billion, was due to increased spending.
  • Only 11.4 percent, or $39 billion, was due to the tax cuts.

The budgetary impact estimates used by the CBO are, for the most part, static. That is to say that official estimates of the impact legislation will have on the government's finances do not account for how that very legislation will affect people's decisions to invest, work, save and consume. Fiscal forecasts become even more iffy when complex legislation is based on a 10-year budget window. For example, last year's tax relief bill contained 108 instances of phase-ins, phase-outs, changes in rates, scale-ups, scale-downs, phase-outs of existing phase-ins, accelerations of existing phase-outs and sunsets.

Reliance on fiscal forecasting means that lawmakers are distracted from time-honored principles of sound fiscal policy, and lose sight of the fact that the primary purpose of taxes is to raise revenue, not to micromanage the economy with subsidies and penalties.

Source: John S. Barry, "Fiscal Forecasting: A Perilous Task," Special Report No. 108, January 2002, Tax Foundation, 1250 H Street, N.W., Suite 750, Washington, D.C. 20005, (202) 783-2760.

 

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