Budget Politics: Problem or Numbers Game?

As President Bush talks about the economy during his State of the Union address tonight, the specter of a drastically shrinking federal budget surplus is looming in the background.

And while it currently exists only on a spreadsheet, the diminishing surplus has effects that are anything but abstract: Less money in the federal coffers means fewer funds for popular programs like prescription-drug coverage or health-insurance coverage. And a decade or so down the road, a potentially huge crunch in Social Security benefits lies in wait.

The latest 10-year budget forecast, an annual report issued last week by the bipartisan Congressional Budget Office, has the surplus withering from $5.6 trillion, the estimate just one year ago, to the current estimate of $1.6 trillion.

Just like that, $4 trillion has vanished. But some Bush administration officials say the figures don't mean much.

"These numbers oscillate wildly and are of very, very little use," White House Budget Director Mitch Daniels told reporters after the CBO announcement Jan. 23.

A year ago, though, the Bush administration was singing a different tune. Back then, when the CBO produced its $5.6 trillion surplus forecast, White House spokesman Ari Fleischer said the CBO numbers were "as close to accurate as the estimating business can be" and "right in line with the blue-chip economic forecasters."

So which view is right? And is the CBO's budget estimate a good one? And why does it matter so much?

A Premium on Economic Forecasting

On a practical level, it matters because the CBO's estimate will be cited countless times in Washington during political budget fights in the coming year. The battle lines are already drawn: Many Republicans claim Democratic spending programs will endanger the remaining surplus, while Democrats are saying Bush's 10-year, $1.3 trillion tax cut has already put the surplus in jeopardy.

With less money in reserve, the surplus has become Washington's most hotly contested zero-sum game, with both parties fighting to decide how to use the leftover cash. Bush is expected to outline additional spending proposals in tonight's address, including more military spending, before presenting his budget proposal to Congress early next month.

But the one thing leaders in both parties agree on is that the recession-bound economy has tied their hands. Lower corporate earnings and higher unemployment mean the government collects less tax revenue from companies and people, further shrinking the budget surplus.

Certainly, a change such as the current slowdown — unlike long-term spending programs or tax plans — is an unpredictable part of the budget equation. So when it comes to budget estimates, the CBO's ability to make good forecasts is at a premium. And in the past, changes in the economy have led the CBO numbers to vary greatly from the eventual reality. In 1997, for instance, the CBO projected a $170 billion deficit for fiscal year 2000, which thanks to a still-booming economy had turned into a $236 billion surplus by the time 2000 rolled around.

Now the opposite scenario seems to be unfolding. The CBO's relatively rosy economic outlook of January 2001 — just two months before the onset of the current recession — helped create its $5.6 trillion estimate. This year, the CBO economists have factored in the recession, taking the surplus projection down a notch.

CBO: Perpetual Optimists?

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