Arkansas Blog

By Brendan Murray

Oct. 11 (Bloomberg) -- For President George W. Bush, the announcement today that the U.S. budget deficit shrank for the second straight year is an opportunity to trumpet the wisdom of $2 trillion in Republican-backed income-tax cuts.

For government bean counters, it was the biggest forecast miss in 21 years.

The Treasury Department said in Washington today the shortfall for the fiscal year that ended Sept. 30 narrowed to $248 billion from $319 billion last year. That final figure is $175 billion less than the $423 billion gap that Bush projected in February.

Tax revenue is hard to project when an economy accelerates and then slows as it has in the past year. Initial government projections are also sometimes unreliable because they include a factor that private forecasts don't -- politics.

``The White House has a track record of projecting budget numbers to be a lot worse than they end up, which therefore helps them defeat the gloomy expectations and declare victory,'' said Brian Riedl, a budget analyst at the Washington-based Heritage Foundation, a research organization that describes itself as promoting conservative fiscal policies.

At a White House press conference today, Bush sought to make the deficit news an asset for Republicans in the Nov. 7 midterm elections, saying ``good tax policy has a lot to do with keeping the economy strong.''

Few administrations have managed precision in budget projections. Since 1982, 25 forecasts in February budget releases have missed the year-end final figure by an average of $87.8 billion, according to figures from the White House's Office of Management and Budget.

Off the Mark

The Bush administration's estimates have been notably off the mark, with the gap between forecast and reality exceeding the averages of the previous three presidents.

``It's a little bit similar to the corporate earnings dynamic,'' said Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Connecticut. ``There's a definite incentive for the administration always and everywhere to overestimate the deficit numbers so that when it comes in better than expected, they can say things worked out better than they thought.''

Bush's budget-forecast misses in the past six years averaged $111.5 billion, according to figures from the White House Office of Management and Budget. That ranks him behind the Reagan administration's $98.1 billion average gap, George H.W. Bush's average of $69.9 billion, and about twice the Clinton administration's $58 billion average.

Reagan's Miss

The forecast that was most off the mark came in 1985. In February of that year, President Ronald Reagan predicted a $62.1 billion surplus, and the final figure came in as a $212 billion deficit, according to OMB.

Administration officials have defended their forecasts as objective and free of political interference, saying tax revenue -- and surpluses or deficits -- in a fast-moving economy are hard to model. Last week Edward Lazear, chairman of Bush's Council of Economic Advisers, sought to ``defend my fellow economists'' in the administration about the unanticipated revenue influx.

``This is just a pure statistical phenomenon,'' Lazear told reporters Oct. 6 in Washington. ``It has nothing to do with strategic behavior by anybody.''

Election Pitch

As the elections approach, Bush has been highlighting tax cuts and a falling deficit as a way for voters to distinguish Republican policies from those of Democrats.

``This strong and growing economy helped reduce the federal deficit,'' Bush said at a fundraiser last night in Macon, Georgia. ``To keep this economy growing and delivering prosperity to more Americans, we need to make the tax relief permanent.''

A Treasury Department economist in the Clinton administration characterized that assertion as a stretch, saying the impact of tax cuts on economic growth is marginal.

``The deficit is going down because of the part of the business cycle we're in, because the stock market is doing relatively well and corporate profits are going up a lot,'' said Leonard Burman, senior fellow at the Urban Institute and a deputy assistant secretary for tax analysis at Treasury from 1998 to 2000.

``Nobody who's serious thinks that the tax cuts have a very large effect on economic growth in the short run,'' Burman said, noting that the economy and stock market were in prolonged expansions after tax increases in 1993.

Other budget watchers said Bush needs to be careful not to sound overly optimistic about the fiscal outlook. While government revenue increased this year about 12 percent, spending rose about 8 percent -- ``one of the fastest rates in decades,'' Riedl said.

``Apparently a $250 billion deficit is now an excuse to go on a spending spree rather than a somber reminder that we're living beyond our means,'' Riedl said. ``It is dangerous for lawmakers to assume that record spending sprees will continue to be covered up by record revenue growth''

To contact the reporter on this story: Brendan Murray in Washington at brmurray@bloomberg.net