Deficit Watch, July 2007

This is very strange: The White House has "lowered" its deficit forecast for fiscal 2007 to $205 billion. 

The White House must be looking at a different set of numbers than the Monthly Treasury Statement I'm looking at.  Not only is the most recent 12-months' deficit of $163 billion already a lot lower than $205 billion, it is also trending toward $135 billion three months from now (...at which time the "most recent 12 months" happens to coincide with the official "fiscal year"). 

The White House's $205 billion forecast is foreboding to me, because if correct, it would mean that we are in for a sudden and unpleasant change in trend for tax receipts or outlays (or both) within the next ninety days.  The simple diagram below illustrates my point: to change a favorably-trending 12-month deficit from $163 billion to $205 billion in three months, something dramatically negative has to happen very soon.

I doubt that's the problem, though; it's rare for a rolling 12-month trend to reverse itself so sharply and suddenly in the absence of some kind of unexpected shock.  I therefore suspect one of two things: (a) intentional padding of the deficit forecast—unsurprising in the game of politics—or (b) unintentional padding due to excessive caution by those calculating the forecast. 

In either case, I think the deficit for fiscal 2007 will be a lot lower: $135 billion (i.e., a harmless 1.0% of GDP).  I also see that if the current trends continue, the unified budget would move into balance in October 2008.  [The Democrats are still saying there's "no way" the budget will balance even by 2012; I don't know which numbers they're looking at, either, but I will be listening closely to their reaction if the budget does balance in 2008 or 2009.] 

Here's the usual chart; click to enlarge. 

Unfortunately, I can think of several things our politicians could do in the interim that would unfavorably disturb the current trends.  As a result, I'll refrain from making "budget balance in 2008" my official forecast until a few more months of momentum make the trend virtually impervious to political blunders.  But I do remain optimistic that the disappearing deficit we are witnessing under the current tax rate structure will become undeniably obvious to every voter prior to the 2008 elections.

Comments

[rufus]

I wouldn't pay too much attention to the high-ball; They're really bad about that.

[Grodge]

I respect the fact that you have the cojones to put out your deficit predictions. And it is quite optimistic by all standards.

In the article you reference: "Bush promises a $33 billion surplus in 2012, but that figure doesn't reflect tens of billions in likely spending for military operations in Iraq and Afghanistan."

Not only "the Democrats", but the president himself does not foresee a surplus until 2012. This is obviously a moving target and depends on the health of the economy over the next 18 months, as well as any increased cost from entitlements-- Medicare shorfalls, especially Part D, the push to insure the 44 million uninsured, rising interest rates, the wars, etc.-- which need to be factored into the equation.

Perhaps your estimate* is more optimistic than both Bush and the Congressional Democrats because they know something we don't?

Kudos to you for your optimism (thus the name of the site). I'll wager, however, that some bump will be encountered that will offset your figure. We'll see.

*I notice that your estimate has been pushed out to October '08 from the August '08 prediction you held in March.

[Mike H]

Steve's estimate changes every month depending on the most resent month's data. So the budget balance month moves a few either way with each new data point. You can't judge a trend based on the change over a couple months. Also, the economy should start picking up for the rest of the year which should really help things.

[Boghie]

Grodge,

Steve is not being optimistic. The source of the estimates you use (CBO and the Whitehouse) have significantly overestimated the deficit for the past four years. Last year the deficit was about a $100 less than the estimates. For example, the initial FY2006 CBO estimate was $423 Billion. The actual deficit was $248 Billion. An error of $175 Billion - or in error by 41%. Using projections similar to Steve I predicted a conservative deficit of $287 Billion in February 2006.

Also, Steve uses actual expenditures - not expenditures projected the proceeding May. Those numbers include all the supplimentals - military, natural disasters, etc.

Steve’s concern is that the Tax Revenue rate is slowing. Revenues are growing at a robust 8% - but, they have grown at 11% - 13% the past years. Corporate tax revenue growth is no longer in the 20%+ range. However, these growth rates are sustainable.

My point about Bush is that he incrementally improves processes (seems to be using a TQL approach – not very good for politics, but very good for sustainable process improvement). The budget - spending and revenue - is now more normalized. But now, the Congressional leadership wants to change the process. We shall see.

[rufus]

The big headline should be the greatly improved "spending" discipline. Outlays are increasing at about 2.5% so far this year. That's very important. It's, also, unlikely to change much in the final year. Bush has no reason to want to make the Democratic Congress any happier than he has to.

Absent a Fed-induced recession we are going to get pretty danged close to that 1st of Oct target. Here's hoping. :)

[Steve]

rufus:
The biggest contributor to spending "control" has been the tapering off of the Katrina relief spending bubble. The Homeland Security spending pattern looks like a snake that swallowed a football. (And, as with the football, much of it turned out to be waste; but I guess we feel better for having spent all those billions, regardless of the waste.)

Independent confirmation that the spending bubble is receding: I have heard from friends in the Houston area that many of their hotel rooms and apartments that had been occupied by Katrina refugees are freed up now that the federal subsidy has expired. Not sure if their simultaneous spike in crime rate has begun receding, however; I'd like to see some before/after stats on that. In any case, we could use a few less direct hits by hurricanes on cities. Maybe I should buy a hybrid car, if that would reduce the next few hurricanes by a few raindrops each.

[rufus]

Steve, I think the hybrid car is a good idea (I might wait for a plug-in that can, also, operate on e85, though,) but I have my doubts on the "Hurrican" preventive aspects of the purchase, however.

Ag subsidies are down about $10 Billion, and, surprisingly (to me, at least) Dept of Ed outlays are down about 17 Billion. I still feel like I must have misread the Education numbers; if anyone can enlighten me on those I would love to hear it.

[Boghie]

Two factors are present in controlled spending:

1. I actually think President Bush has incrementally tightened the spending process. I think he is getting it under control. His idea seems to slowly bring that beast to heel.

2. The split government is slowing the Bi-Partisan ‘Pork Cooperation Spending Program’ down quite a bit. Both Parties have split from the center so far that they cannot even cooperate on spending other peoples money. Can you imagine Duncan Hunter voting for some ‘Even Cleaner Air Powered by Wishes and Emotions’ bill to get a ‘Even more Deadly and Accurate Tomahawk Missile’ program funded. Me thinks not…

So, while Bush would have presided over spending increase slowdowns of a point a year we are now seeing gridlock provide almost a four point drawdown this year. If the government cannot agree on tax increases and spending programs expect a surplus for FY2008 and a huge surplus for FY2009. The only thing standing in the way is the death of the economy – so, for those so inclined, pray for a depression or crippling domestic attack or a biblical firestorm (the flood was tried!!!).

Enjoy the prosperity!!!

[rufus]

Boghie, Agreed.

BTW, I predicted a small surplus in 08' on Kudlows blog back in Dec of 05'. Looks like I might miss it by just a skosche, but it's gonna be close.

[Counter Revolutionary]

I'm waiting for it to drop below $100B, at which point its going to look like roaches after the lights are turned on. Most will be surprised, but the Pols will fall over each other taking credit, and trying to make it balance faster.

[rufus]

THEN, we got a whole "New Problem" (how to convince all the idiot Pols that "Surpluses" really, are NOT Good, and that we need to start figuring out which taxes to "Lower!" I'm nominating the Corporate tax. About "0" sounds right to me.

[crashex]

The spending trendline is leveling off near 2.7 T$. Unfortunately, the Congress keeps talking about a 2.9 T$ budget for FY 2008, and the illustrated trendline projection is well under that. So, if the budget expenses come in at the level discussed for the legislation for FY 2008, then the trendline becomes nearly parallel to the revenue growth and the annual deficit doesn't fad away; it remains constant.

[Counter Revolutionary]

crashex, if there is one thing shown by Steve's graphs, talk is meaningless. Look at the real numbers. 2007 is a year when new budgets were not passed. We are operating under continuing resolutions, same spending as the previous budget. I think 2008 will be nearly the same, unless the Dems get smart and realize the "unified budget" is about to balance.

It's going to be awful interesting watching them explain how increased taxes are needed with a surplus. Of course they will find a way to explain it.