CBO's New $1.5 Trillion Deficit Projection Is No Big Deal
My column from today's Roll Call explains why the latest projection from the Congressional Budget Office showing the current year deficit will be $1.5 trillion, which was released last Wednesday, wasn't the big story many said it was. In fact, it wasn't a story at all.
New CBO Deficit Number Is ‘Dog Bites Man’ Story
By Stan Collender
Roll Call Contributing Writer
I realize that it’s only February and that a great many federal budget debates, votes and cliffhangers are still ahead. But even though the year is young, the topic that received so much media attention last week — the Congressional Budget Office’s new $1.5 trillion estimate for the fiscal 2011 federal deficit — may well be the biggest budget non-story of the year.
It’s not that $1.5 trillion isn’t a large number; it obviously is. But the screaming headlines in major publications and horrified reports on radio and television were way over the top. They made it sound as if it was a surprise that Congress and the White House had agreed to enact tax cuts that increased the federal deficit.
The CBO report was not news because it did nothing more than confirm what was completely understood when the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 was negotiated, debated, passed and signed into law last year. A small story on Page 37 (Is there still a Page 37 in any section of a newspaper these days?) would have been understandable. But there was nothing that justified the front-page, above-the-fold treatment the projection received.
Six tax cuts and an extension of unemployment benefits were enacted in December, and the known budget effect of each was to — wait for it — increase the deficit. It was widely understood during negotiations that, of all the alternatives being considered, the final agreement that Congressional Republicans cut with the White House was the one that would increase the deficit the most.
According to the CBO, extending the individual income tax cuts that were scheduled to expire Dec. 31 increased the projected 2011 deficit by $98 billion. Patching the alternative minimum tax to prevent some taxpayers from being subject to the AMT in 2011 cost $86 billion. Reducing the employee payroll tax rate and allowing companies to deduct the full cost of business equipment in the first year reduced revenues by $84 billion and $55 billion, respectively. All other tax changes, including the lower estate tax rate and the higher exclusion for 2011 and 2012, increased the deficit by $31 billion. Add the $37 billion in additional spending from extending unemployment benefits through 2011 and a few other changes, and you get to the total: a $390 billion deficit increase in 2011. The CBO says those provisions will increase the projected deficit by more than $400 billion in 2012.
During the negotiations and debate on the tax deal in December, no one disputed that these policies would cause the deficit to be higher than it otherwise would have been. (Note to those who insist that tax cuts don’t increase the deficit: These tax cuts do not pay for themselves, and the deficit is projected to rise because of them.) No offsets were added to minimize the expected effect on the deficit, although they obviously could have been included. In fact, had spending cuts or revenue increases been included so the budget deficit wouldn’t be increased at all or by as much, the deal likely wouldn’t have been possible and the legislation probably never would have been adopted.
What was the real story? For one thing, despite campaign rhetoric to the contrary, there was a great deal of bipartisan support in Washington for policies that would increase the budget deficit. The tax cut deal enacted in December, which was adopted by wide margins in both chambers (81-19 in the Senate and 277-148 in the House), was adopted over the objections of some, but it was adopted nonetheless. And many of those who complained the loudest about the deficit during the campaign still voted for the deal a month or so later.
The second part of the story is that Washington’s willingness to consider policies that would increase the deficit hasn’t changedsince the election, either. New rules recently approved by the House of Representatives actually make it easier to increase the budget deficit as long as the additional red ink is caused by tax cuts and not spending increases — the same policy included in the tax deal.
Last week’s deficit shock is the federal fiscal equivalent to that wonderful musical number in the film “The Best Little Whorehouse in Texas,” in which a crusading reporter makes clear that he’s absolutely stunned to learn that such activity goes on in his state. Or maybe it’s similar to the scene in “Casablanca” in which the police captain orders his men to round up the usual suspects, even though he already knows who committed the murder. At the very least it’s a “dog bites man” story that deserved anything but the reaction it received.