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CBO Sees Huge Reduction In Deficits Beginning In Three Years

By | January 28, 2008

      Budget Deficits Projected To Swing To Surpluses

      Vast Improvement In Federal Finances In Next Decade Could Be Enough To Permit Giant Funding Gains For NASA, Missile Defense, Other Federal Programs

      The annual federal government budget deficit will plunge by an effective $328 billion from the fiscal year ending Sept. 30, 2010 to fiscal 2012, the nonpartisan Congressional Budget Office estimated last week.

      That would be followed by more years flush with revenues, to create federal budget surpluses in place of deficits.

      For perspective, $328 billion would be equivalent to the amount of money required to double the roughly $27 billion combined budgets of NASA and the Missile Defense Agency for more than a decade.

      The $328 billion net improvement in the federal budget deficit picture, from $241 billion of red ink in fiscal 2010 billion to an $87 billion budget surplus in 2012, assumes that Congress will permit the tax cuts enacted in 2001 and 2003 to expire automatically, as those tax-cut measures provided

      Republicans in those years inserted provisions in the measures providing that the tax cuts would end automatically at the end of the decade. Democrats at the time alleged that Republicans did that just to conceal the trillions of dollars of revenue losses that the tax cut measures otherwise would cause in the next decade.

      But Republicans, including President Bush, now are calling for the tax cuts to be extended for another decade, or made permanent.

      Many Democrats, who control Congress, oppose any such move. Thus if Democrats retain control of Congress in the November general election, it is unlikely that the tax cuts will be extended, at least not at anything like their current size. Election of a Democratic president might make extension or permanent status for the tax cuts even less likely.

      In the near term, CBO projects that deficits are going to be sizeable: from $163 billion in fiscal 2007, they jump to $219 billion in the current fiscal 2008, then drop slightly to $198 billion in fiscal 2009 before peaking at $241 billion in fiscal 2010, after which some tax cuts expire.

      Then the overspending drops to $117 billion in 2011, before the federal budget swings into surpluses beginning with $87 billion more revenues than spending in 2012.

      Surpluses then continue on an uneven path until soaring to $151 billion in the black in fiscal 2017, and $223 billion in fiscal 2018.

      So, long-term, there will be hundreds of billions of new revenue dollars in the federal financial system each year, compared to typical years in this decade.

      However, history shows that when revenues increase, there can be intense competition for the money. And in 2010-2012, as steadily more baby boomers retire, there will be debate about shoring up finances of Social Security, Medicare and Medicaid.

      As well, finances have been tight in education and other federal areas.

      And, to be sure, it is possible that the fiscal picture might not be as rosy as the CBO report indicates.

      For example, it assumes that the Alternative Minimum Tax, designed in the 1980s to make billionaires pay some taxes no matter how many tax breaks they may use, won’t be repealed. But there is intense pressure to repeal the AMT or scale it back, as more and more taxpayers become subject to it.

      As well, the CBO projections assume that spending on the wars in Afghanistan and Iraq won’t rise.

      And for the short term outlook, the nation now seems to be on the edge of a recession, at least according to some financial analysts and economists.

      In a recession, U.S. output of goods and services declines instead of growing. That means that federal tax revenues decline, along with the drop in the number of taxable transactions as the economy cools. Too, federal spending tends to increase, as more workers are put in the street and become eligible for unemployment benefits.

      All of that would tend to push federal budgets toward the deficit side of the ledger.

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