How to Make the Deficit Look Smaller Than It Is

November 23, 2003
ECONOMIC VIEW
How to Make the Deficit Look Smaller Than It Is
By DANIEL GROSS
Source

The news on the federal budget deficit for fiscal 2003 was encouraging, wasn't it? In July 2003, the Office of Management and Budget projected a record deficit of $455 billion. But when the fiscal year ended in October, the shortfall was only $374 billion, equivalent to 3.5 percent of gross domestic product.

"As a percentage of gross domestic product, the deficits are below the historical peaks that we've seen in the past," says J. T. Young, a spokesman for the Office of Management and Budget. In 1983, for example, the deficit was 6 percent of gross domestic product; in 1992, it was 4.7 percent.

Congratulating the administration for such an achievement, however, would be like raising the allowance of a high school student who brought home a D-minus in math instead of an F.

If we factor out the so-called Social Security surplus - payroll taxes collected by the government but not paid out in benefits - the deficit in fiscal 2003 was actually far larger: $531 billion, or 4.9 percent of gross domestic product. For the current fiscal year, the administration expects that this figure, also called the on-budget deficit, will be even higher: $639 billion, or a whopping 5.4 percent of gross domestic product.

Every year since 1983, workers have paid more in Social Security payroll taxes than Social Security has paid out to beneficiaries. The surplus was supposed to be used to pay down the national debt. "That way, when the baby boomers are retired, our other debt will be lower and we'll be in a better position to borrow funds to pay for benefits," said Richard Kogan, senior fellow at the Center on Budget and Policy Priorities, a liberal-leaning group in Washington.

To ensure the proper use of the Social Security surplus, Vice President Al Gore in 2000 proposed segregating the funds into a sort of lockbox. George W. Bush, then the Texas governor, also supported this concept, although his understanding of Social Security was revealed to be something less than complete. (In November 2000, during a campaign speech, he famously accused opponents of wanting "the federal government controlling the Social Security like it's some kind of federal program.")

In the past three years, President Bush and Congress have viewed the Social Security surplus more as a cookie jar than a lockbox. The three budgets that Congress proposed, and President Bush signed - for the fiscal years 2002, 2003 and 2004 - used $480 billion in excess Social Security payroll taxes to fund government programs. According to the budget office, administration policies call for an additional $849 billion of excess Social Security funds to support government operations over the next four years.

Using excess payroll taxes for unintended purposes masks the true size of the operating deficit. The budget office predicts that the net deficit will shrink from $475 billion in fiscal 2004 to $226 billion, or 1.7 percent of gross domestic product, in 2008. Take away the ever-larger Social Security surpluses used in each of those years, however, and the on-budget deficit will stand at $464 billion in 2008.

The reality will likely be far worse, especially if you factor in costs that the White House doesn't include in its projections - like the $87 billion recently appropriated for the war, or the extension of recently enacted tax cuts. In doing so, the Center on Budget and Policy Priorities, the business-oriented Committee for Economic Development, and the anti-deficit Concord Coalition have concluded that next year's on-budget deficit will be $687 billion - not $639 billion, as the administration suggests. In 2008, the groups say, the on-budget deficit will be $692 billion and the net deficit will be $457 billion, or twice the Bush administration's projection.

THE figures show that the personal and corporate income taxes that are supposed to fund government operations no longer come within shouting distance of doing so. And the refusal of the administration or its Congressional allies to acknowledge this reality has left normally mild-mannered deficit hawks on the verge of apoplexy.

"The last time the situation reached this point, in the early 1990's, we had bipartisan agreement that we were reaching a fiscal crisis," said Maya MacGuineas, executive director of the Committee for a Responsible Federal Budget in Washington.

The response then was an unpalatable, but ultimately successful, mix of spending restraints and tax increases. But in the past few years - with the sums involved far greater than they were in the early 1990's, and with the baby boomers nearing retirement - Washington has raised spending sharply and cut taxes even more sharply.

It's a fiscal Bizarro world.


Daniel Gross writes the Moneybox column for Slate.com.