The Congressional Budget Office (CBO) has released two analyses of the country’s current budget picture that anticipate a deficit even larger than that predicted in March and confesses to a great deal of uncertainty for the long-term budget forecast.

In its Monthly Budget Review released August 9, CBO estimates a $157 billion deficit for FY2002, which ends September 30 of this year – as compared with the $100 billion FY2002 deficit it predicted in March of this year and the $127 billion surplus for the previous fiscal year. The administration’s budget analysts at the Office of Management and Budget (OMB) are predicting a slightly larger FY2002 deficit of $165 billion (see this July 22 OMB Watcher story for more). The chart below shows how these estimates compare.

It is dramatic changes like these that may have necessitated a second CBO report, "Where Did the Revenues Go?," on August 13. In this report, CBO almost seems to be coming to terms with the cumulative $284 billion drop since last year’s surplus estimates. CBO concludes that this year’s massive increase in the deficit is due in great part to so-called “technical changes,” which are closely linked to “economic changes” (such as a recession or an increase in unemployment). These technical changes, to which CBO attributes $103 billion of the total $157 billion loss in revenue this year, occur when CBO adjusts its estimates and calculations for new developments in how individual and corporate tax payers respond to the external economic changes. Thus while CBO notes that, “the most obvious explanation for what happened to the receipts is the recession, which has reduced the level of economic activity – the main determinant of tax collections,” this most recent revision of the deficit numbers is also a factor of CBO’s better understanding how taxpayers have responded to the recession.

These adjustments reflect a steep drop in capital gains, the relatively slowed growth of incomes among the highest earners in the country, and individual decisions about withholding of taxes. Thus while CBO’s report points out that, “more of the explanation for why receipts have come in low rests with the overall behavior of the economy than indicated by CBO’s own [current] estimates,” the report explains that the reason these numbers have taken everyone by surprise is, quite simply, because “the recession was worse than it first appeared.”

It is likely that the Administration and other supporters of the June 2001 $1.35 trillion tax cut and future tax cuts will take CBO’s report as a sort of vindication, since the report does state that this year’s drop is not directly related to either the June 2001 tax cut or the “economic stimulus package” of March 2002. But while this CBO report does acquit last year’s tax cut of this year’s budget deficit, the March 2002 CBO budget report and last year’s revised outlook showed that over the second half of the tax cut, from 2005-10, the tax cut’s role in creating the projected budget deficit will grow into the trillions of dollars. A recent Economic Policy Institute (EPI) brief by Max Sawicky estimates that, over the course of the lifetime of the tax cut, it will be responsible for 67% of the drop in our country’s revenues. And even this technically-minded recent CBO report notes that $51 billion of FY2002’s drop in corporate income tax revenue is “mostly due to the recent stimulus bill” – which many have argued is doing little to help diminish the current 5.9 percent unemployment rate.

CBO will issue its annual revised “Budget and Economic Update” 10-year forecast on August 27 this year. But already, the picture from the White House is not encouraging. OMB Director Mitch Daniels, speaking at the president’s “Economic Summit” in Waco, TX, last week said that, “the lesson I submit to you is very clear. We have to control what we can control, and that is spending” – Daniels held up the president’s veto of $5.1 billion from last month’s emergency supplemental as one example of such control.

As the chart below shows, not all spending is being targeted by Daniels. For example, defense spending jumped from $239 billion in 2001 to $273 billion this year and will likely top $355 billion next year.

OMB Watch is part of a coalition of nonprofit organizations working to educate about the necessity of and advocate for freezing the tax cuts at current levels to help preserve precious revenue for the country’s many priorities. We must recognize that the country cannot go forward with costly tax cuts aimed almost entirely at the rich while we face this growing deficit, a slowed economy, and a very real need for a prescription drug benefit for the country’s seniors, a Social Security system that continues to earn our trust, improvements and investments in our children’s education and our environment – not to mention this year’s increased need for strengthened domestic security or the whole host of other improvements Americans consistently rank far above tax cuts. We certainly cannot allow the White House and other supporters of more tax cuts to hide behind numbers and this year’s technicalities to excuse current and future tax cuts.