Mid-Session Review Understates Future Deficits By A Lot

One note of praise for President Bush before I slam him for $8 trillion of fiscal deterioration over eight years.  Up until this year, his budget deficit forecasts were mostly too pessimistic.  Most president's understate future deficit estimates.  Unfortunately, his February Budget, and now his Mid-Session Review, seriously underestimate the deficit for Fiscal Year 2009 and beyond.

First, he continues this myth that Iraq/Afghanistan war spending is an "emergency," a very loaded technical Budget Act term meaning he doesn't have to budget for it on a recurring basis.  This War has always been funded through "emergency" supplemental appropriations once of twice every years since 2003.  You would think a five-year "emergency" would be an oxymoron, and you would be right, anywhere besides Washington.  The War is running just under $200 b. a year.

Second, he continues to assume the Alternative Minimum Tax will be allowed to hit 24 million families next year, up from 4 million currently, when there is no chance he and Congress will actually allow that to happen.  That will cost $62 b. to fix later this year, and it will get much more expensive a year going forward.

Third, he's overestimating revenues that this weak economy will generate. It's still unclear whether we're in a recession, but it is clear that a weakening economy will dramatically lower future federal revenues.  This could easily amount to $200 b. next year.  In its annual Budget Outlook, CBO noted that the average post-WWII recession has raised the deficit by 2.2% of GDP.  See page 129.

Fourth, President Bush's Mid-Session Review projects shear fantasy beyond Fiscal Year 2009 with sharply declining deficits that just won't happen.  We are in for a string of sharply rising deficits for at least the next two years and probably longer.  A year or two from now, we'll look backing longingly at 3% of GDP deficits.