Deficit Surging...."DOWNWARD" !

Surging

By the Editors of NRO

More than two years ago, when President Bush announced his aim to cut the federal budget deficit in half by 2009, many critics guffawed. They called the goal an impossibility, a na�ve and futile effort that would be undermined by the fat-cat Republican tax cuts. A Boston Globe headline declared, �Bush�s plan to halve federal deficit seen as unlikely; Higher spending, lower taxes don�t mix, analysts say.� An Associated Press story went out on the wire with the headline, �Bush goal of halving federal deficits draws skepticism, derision.�

In that AP article, Sen. Kent Conrad, the top Democrat on the Senate Budget Committee, was quoted deriding Bush�s plan: �It�s like so much with this administration in respect to fiscal matters, it�s all spin, all the time.� Former Congressional Budget Office director Robert Reischauer called the proposal �fanciful.� To Democrats, the AP reported, Bush�s goal was simply �laughable.�

But the critics are no longer laughing. Driven by a surging national economy, tax revenues are increasing and the deficit is rapidly shrinking. The president�s deficit-reduction plan looks like it will not only succeed, but will do so years ahead of schedule.

The country was facing the largest projected deficit in history when Bush promised to halve it as a percentage of GDP by 2009. Due to high wartime spending and the residual effects of the 2000�01 recession, the White House expected the 2004 deficit to reach $521 billion, or 4.5 percent of GDP. Bush�s goal was to reduce this to 2.25 percent by 2009.

After all the beans were finally counted, the 2004 deficit came in at $413 billion�roughly 3.5 percent of GDP. The economy had begun expanding, partly in response to Bush�s tax cuts, creating jobs and boosting revenue. This trend continued into the next year, pushing the deficit down to $319 billion in 2005.

This year, the projections look even better. Through the first eight months of this budget year, the deficit is $227 billion�16.7 percent lower than this time last year. That�s largely because government revenues in these eight months have reached $1.545 trillion, up 12.9 percent from last year.

This huge revenue boost means that the deficit is going down even as an out-of-control Congress continues its spending profligacy. Federal spending has already swelled by $130 billion so far this fiscal year�a 7.9 percent increase compared with the same period last year. Such increases can�t be blamed entirely on the demands of the War on Terror, either, as Defense and Homeland Security together account for only 30 percent of Congress�s total spending increases since 2001.

Despite the strong updraft of federal spending, the deficit is on track in the next few years to continue falling until it approaches 2 percent of GDP. This is below the 2.5 percent that has been the national average since 1970, demonstrating that the president�s critics were simply wrong when they claimed that the Bush tax cuts would lead the country into economic ruin.

There is a lesson here, and it is vindicatory of the central claim of supply-side theory: Easing the national tax burden spurs economic growth, significantly mitigating the revenue loss that results from tax cuts. The national economy is a dynamic system, and it responds to the incentives and disincentives imposed on it by government policies. When businesses and individuals are allowed to keep more of what they produce, they produce more. And when investors are allowed to keep higher returns, they invest in more productive endeavors. This boosts GDP, which in turn boosts tax revenues.

We cannot grow our way out of our long-term fiscal woes. Pro-growth tax policies must be supplemented by serious entitlement reform to curtail the huge unfunded liabilities created by Social Security, Medicare, and Medicaid. And spending cuts on other domestic programs would be worthwhile as a way to reduce Washington�s influence to its proper size, quite apart from their effect on budget balances. Surging revenues are a reason to stick with the tax cuts. They are no reason to quit trying to bring spending under control.