The White House believes that the deficit has peaked and that the shortfall for the first half of 2010 will be much less than expected. The Administration bases this on an analysis of higher tax receipts and the cost to bail out the financial system was $115 billion less than expected.
Based on new figures that The Washington Post got from an Administration official, the annual budget shortfall could be $1.3 trillion, and not the $1.5 trillion it assumed when the budget was submitted earlier in the year. The paper reports that the President’s financial advisers expect the first half deficit will be down “8 percent over the same period a year ago.”
There is some support for the analysis in the March data on the budget from the Treasury. The department’s report on month showed “a shortfall of $65 billion with monthly receipts of $153.3 billion and outlays of $218.7 billion. In March 2009, receipts were $129.9 billion and outlays of $320.5 billion. The deficit for the month was $191.6 billion. For the first quarter of 2010, the deficit was $329 billion compared to $448 billion in the same quarter a year ago.
The news is good, if it is correct. The national debt was $12.7 trillion at the end of March, fairly close to the statutory level of $14.3 trillion set by Congress. It would have been politically difficult for the Administration to go back to Congress to increase that limit.
The White House could be wrong. Tax receipts may be improving now, but high unemployment, which could plague the workforce well into 2011, means that each taxpayer may not contribute as much to the IRS as expected in the original budget. While the costs of TARP and other financial programs created due to the credit crisis may have saved money, American businesses, especially small ones, are struggling with a lack of credit that will stymie their expansion.
On the cost side of the budget, programs to support the chronically unemployed are continuing to rise and Congress continues to repeatedly increase the length for which unemployment benefits and medical support programs are paid. If the jobless rate stays near 10% and more people are out of work for 26 weeks or more, the Administration may ask and Congress may approve packages which cost tens of billions of dollars.
If instead Congress elects not to extend benefits, consumer spending which increases taxable income for retailers and their suppliers will fall, further damaging IRS receipts from business.
The national debt is expected to rise to $20 trillion by the end of the decade. The debt service on that sum will be, by some estimates $700 billion a year. That will cause difficult decisions about large programs which support a growing population of retires citizens, and the payout of Social Security may be jeopardized.
The White House may be right about the deficit reaching a peak, but a number of factors say that the analysis behind that belief is wrong. The Administration’s statements about the shortfall going forward may encourage Congress to expand expenses with the assumption that rising revenue will make those increases reasonable, But, if the calculations are wrong, the federal government will end up taking a wrong turn.
Douglas A. McIntyre