October 28, 2005,
By Jerry Bowyer
The Treasury Department recently released its monthly budget report for September. Since the federal government is on a September fiscal year, this is the final report for this year’s budget cycle. This month, October, begins a new budget year.
The final budget numbers got very little attention. In fact, they were given much less prominent play than the various estimates and forecasts that come out of the Executive Branch, Legislative Branch, and outside policy groups. This is strange because, in the end, the only budget numbers that really matter are the budget numbers themselves. And it turns out that these numbers paint a fairly encouraging picture.
Perhaps that’s why they didn’t get much coverage.
The deficit dropped by 23 percent in the latest fiscal year, down to $318.6 billion. This occurred because the economy is booming. Personal income tax receipts are up 14.6 percent, which obviously points to higher overall income growth. True, wages and salaries are a bit flat, but there are other forms of income: proprietorships, consulting services, dividends, commissions/bonuses, and capital gains. For that last category, it looks like 2005 will turn out to be the best year since 2000. Precisely how many times do supply-siders need to tell the static guys that cuts in capital gains rates can lead to increases in capital gains revenues? More important, how many times does actual economic performance need to teach this lesson before the bean counters believe it?
Once again, the Laffer curve gets the last laugh. Corporate tax collections went through the roof for fiscal 2005. Corporate income taxes, according to economy.com, were up in 2005 by an astonishing 47 percent. The booming economy is really a double blessing when it comes to its impact on federal deficits. As we’ve already seen, economic growth drives revenues higher and deficits lower. Additionally, it drives the ratio of debt to growth even lower.
You see, it’s not the size of the deficit in itself that matters, but its size relative to the economy. Similarly, it’s not the size of your mortgage that counts, it’s the size of your mortgage divided by your monthly income. The deficit is now down to 2.57 percent of GDP a clearly manageable level and far lower than other war-time budget situations.
Do you remember all of the budget hand-wringing during last’s year’s election? “Exploding deficits as far as the eye can see,” the “Rosy scenario,” the alleged suppression of the fiscal impact of the Medicare drug benefit, and the “exploding” cost of the Iraq war, which we were reminded again and again had “not yet been factored into the budget.”
Does any of this ring a bell? Well, in the final analysis, all that speculation turned out to be flat wrong.