The Washington Post ran a good article on the tax cuts and the deficit yesterday- lots of interesting quotes from credible folks with different opinions. Here's a great quote on the forces driving the lower deficit:

"The simplest way to think about it, I think, is we know we have growing income inequality, especially at the top," said Isabel V. Sawhill, a Brookings Institution economist who worked for the Clinton administration. "The very rich are pulling away from the ordinary rich and the middle class. Those very rich people pay higher tax rates. When the distribution of income shifts upward, as it has in recent years, you get a revenue kicker from that."

Now, compare that article with one Reuters ran on Monday, in which most quotes come from economists housed at businesses or law firms, and the only option for reducing the deficit that's really presented is to cut spending. Further, the assertion that the Bush tax cuts lowered the deficit goes unchallenged, and the title -"U.S. Budget Deficit Could Shrink Further in 2007"- is highly implausible, given that the Congressional Budget Office predicts the deficit will increase in 2007.

The Reuters article is irresponsible; take a look at the Washington Post article for a serious discussion of the relationship between the Bush tax cuts and the deficit.

Following up on a recent blog post by my colleague Matt on interest expense, I wanted to point out yesterday's report by the Treasury that the government's net interest payments on the national debt reached $226.6 billion in FY 2006, an increase of 23 percent over FY 2005. (See the Monthly Treasury Statement, Table 9.)

Put another way, almost all of of the last fiscal year's $248 billion federal deficit is accounted for by interest expense. Some of the increase itself results from markets and monetary policy (yielding higher interest rates). But less-than-responsible fiscal policy in recent years has pushed federal interest payments up to the point where a vast proportion of the deficit reflects the dead-weight expense of paying down the cost of the debt.

The President is mighty proud of the new deficit numbers. In fact, he called a press conference to say that the tax cuts he pushed have generated the surge in revenue that's partly responsible for the lower deficit this year.

Hmmmmm. Well, corporate profits have gone way up, it's true. And he did cut taxes on corporate profits. There's a correlation there, for sure.

But wait- his Treasury Secretary's old outfit- Goldman Sachs- thinks there's something else going on. In a recent report, they wrote, "the most important contributor to higher profit margins over the past five years has been a decline in labor's share of national income."

It could be that tax cuts had a marginal impact on profits, and therefore increased revenues collected on profits in the short term. But even the hardly liberal Goldman Sachs found that the main reason for higher profit margins is that corporations are squeezing what's left of the middle and lower class. Is that something the President should be proud of?

They must think we're not paying attention.

Have a look at this statement, from an editorial in the Washington Post:

The Bush administration announced last week its revised figure for this year's budget deficit: $445 billion. This, or so the spin goes, is good news, because the original forecast was even higher -- $521 billion. But outside budget experts had warned that the forecast was inflated, which tarnishes any celebration of the new number. Not that the administration was deterred. "This improved budget outlook is the direct result of the strong economic growth the president's tax relief has fueled," crowed Office of Management and Budget.... Only in the administration's upside-down economic world could a deficit $70 billion higher than last year's be hailed as progress.

We've seen this movie before, haven't we? This editorial exposes the Administration's little deficit trick, the 2004 campaign edition.

OK, the Bush Administration isn't the first to try this maneuver. But how egregious it is compared to recent administrations? As Bloomberg reports:

"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."

That's quite some record. The biggest misforecast in 21 years."

To follow up on Matt's discussion below of the final deficit figures for FY2006, I thought I'd point to some of the wildly disparate explanations offered for it.

Says Speaker Hastert, whose credibility right now is not exactly at an all-time high: "Republicans have cut the deficit in half three years ahead of schedule because they know that tax relief fuels America's economy." President Bush added a corollary last night: "Do we keep taxes low so we can keep this economy growing, or do we let the Democrats in Washington raise taxes and hurt the economic vitality of this country?"

But, counters Robert D. Reischauer, former director of the Congressional Budget Office: "The consensus among economists is that the tax cuts of 2001 and 2003 and the extensions have done little to boost economic growth, having been offset by increased spending."

And CBPP provides this historical perpective: "That deficits declined in 2005 and 2006 amidst an economic recovery tells nothing about the efficacy of Administration policies, especially considering that deficits turned to surpluses during the 1990s recovery, following tax increases in 1990 and 1993."

President Bush on the Treasury's announcement that the FY 2006 budget deficit is $248 billion:

First, I want to briefly mention that today we've released the actual budget numbers for the fiscal year that ended on September the 30th. These numbers show that we have now achieved our goal of cutting the federal budget deficit in half, and we've done it three years ahead of schedule.

1) The deficit has not yet been cut in half. The President promised during the 2004 campaign to cut the deficit in half in four years. The deficit reached $412 billion in 2004, and this year's deficit is $248 billion. That's not 1/2.

The baseline from which the President thinks the deficit has been cut was merely his own estimate. That OMB estimate -$521 billion- was wildly off the mark, and not because of policy changes that OMB could not take into account. It has no place in a serious discussion. "They've cherry-picked a high point that never actually occurred," said Robert Greenstein of the Center on Budget and Policy Priorities in CongressDaily ($$).

2) Cutting the deficit in half, as Dana has written, is not good enough. The deficit is still very large, and nothing has been done to address the structural factors that are estimated to produce larger deficits next year and the year after.

3) What's happening here is the President is trying to manage public expectations. He wants the voting public to think he has made the best out of a bad situation. That way, people won't think it's so bad that the Administration’s current deficit is nearly half a trillion worse than when Bush took office, or that the national debt is up by about $3 trillion, to a total of $8.5 trillion.

I doubt this will happen. People still have high expectations, because I don't think anyone has forgotten the budget surpluses of only 5 years ago. And the deficit may be beginning to negatively affect ordinary people. In the final analysis, the fiscal policies of this Congress and the President will be seen as nothing more than the failures they are.

The final CBO FY 2006 deficit estimate numbs are in … at a cool quarter of a trillion dollars. The $250 billion figure released today is well under CBO’s estimate of $337 billion at the beginning of the year and the $318 billion actual deficit for FY2005.

Until this summer, the deficit projections were uniformly in the $300 billion-range, but a late surge in corporate income helped boost FY2006 revenues by $253 billion over last year’s total.

Despite this year’s figures, the nation is still experiencing the largest 6-year deterioration in the budget in 50 years, a $486 billion drop from the last surplus recorded in FY00, said House Budget ranking member John Spratt (D-SC).

Moreover, the reduced deficit figure for FY06 obscures the true nature of the nation's fiscal condition going forward. According to CBPP:

The outlook for the budget over the next 10 years (much less for the following decades, when increasing numbers of baby boomers will retire) remains bleak. CBO’s projections show that, if the President’s tax cuts are made permanent and relief from the alternative minimum tax is extended, deficits will total nearly $3.5 trillion over the next 10 years (2007-2016).

Shorter Sebastian Mallaby: Democrats have no principles because they won't cut Social Security for married low-income people.

Snark aside, I bring this up because Mallaby and many of the entitlement-reform-obsessives around Washington are missing the point about fast-growing government spending. The fastest growing part of the budget are interest payments on the national debt. For more, Daniel Gross has a great article in Sunday's NYT explaining why interest payments have taken off.

Additionally, unlike entitlement spending, high interest payments (and the deficits that help drive them up) serve no social or economic purpose five years into an economic recovery. In fact, it's even more likely that they are an impediment to growth and crowd out spending for other public priorities.

Mallaby's perspective is particularly ironic considering that the Bush administration's adamant refusal to increase taxes or lift the payroll tax cap for high-income earners forces any proposed solutions to either cut benefits (hurting more than just Mallaby's self-professed Democratic strongholds of "poor women and minorities") or add even more debt to the country's books - further imperiling other social spending through even higher interest payments.

Now that would be fiscally irresponsible.