THE WHITE HOUSE, the Treasury Department, congressional Republicans, President Bush’s reelection campaign–in unison, they rushed forward last week to tout the new job growth numbers. What’s most striking is the economy is now on pace to create 2.8 million jobs in 2004, more than offsetting job losses suffered earlier in the Bush administration. And there’s more good news on an issue related to the economy–the deficit. Democratic presidential candidate John Kerry, citing the deficit, has accused Bush of fiscal irresponsibility. Now the deficit is shrinking so quickly that the president, if reelected, should be able to claim he’s near to cutting the deficit in half–and not in five years, as he had promised, but in two.
The actual deficit number, projected to be $521 billion in 2004, probably won’t be cut in half by 2006. But the deficit as a percentage of the gross domestic product–a more meaningful yardstick–most likely will be. By 2006, it should settle at 2.1 percent or 2.2 percent of Gross Domestic Product, which is the average for the deficit since World War II. At that level, it would not be harmful (or particularly helpful) to the economy.
Bush first vowed to trim the deficit in half last summer. In December he told reporters the goal was based on “reasonable growth assumptions.” The administration, in fact, has adopted the relatively conservative assumptions of the Blue Chip forecast of respected economists. In his State of the Union address, Bush declared again: “We can cut the deficit in half over the next five years.” And in the 2005 budget released a few weeks later, the deficit was projected to drop from 4.5 percent of GDP in 2004 to 2.1 percent in 2006. At the time that projection seemed highly optimistic, given the huge expense of the military occupation of Iraq. Now it appears to be on target or even pessimistic.
Already in 2004, the deficit has been decreasing dramatically. The $20 billion “plug” in the 2004 budget to cover unanticipated spending will not be needed. With faster-than-expected economic growth, revenues are $40 billion higher than projected. So instead of a $521 billion deficit this year, administration officials expect it to fall between $450 billion and $460 billion. Bill Hoagland, an economic adviser to Senate majority leader Bill Frist, has said it could dip to $420 billion.
Sorry for all the green eyeshade material, but there’s more. The deficit for 2005 is projected to be $364 billion, not counting the spending for Iraq, which is tentatively forecast to be roughly $58 billion. Officials believe, however, that increased revenues due to faster growth will more than cover the Iraq expense. As a result, the deficit could dip to $320 billion to $330 billion, but in any case shouldn’t exceed $360 billion.
After a year or so, economic projections turn into guesswork. That said, last February’s budget projected the deficit would decline to $268 billion in 2006 and then drift downward for the next three years to $237 billion in 2009. According to projections, the 2009 deficit would be a mere 1.6 percent of GDP, far less than the 60-year average for deficits. But who knows? Only the current numbers, with revenues exceeding expectations, are certain.
The current numbers alone give Bush valuable economic talking points. Despite the added expense of Iraq, the deficit is improving. True, the gains aren’t as significant as the pickup of nearly one million jobs in the past three months. But the shrinking deficit is further evidence that the Bush tax cuts are working, thus buttressing the president’s opposition to Kerry’s proposal to eliminate the tax cuts for those earning more than $200,000 annually.
There’s talk inside the administration of a major effort to trim the deficit on the spending side, not just through increased revenues. That is, if Bush is elected to a second term. This initiative would be led by Josh Bolten, the head of the Office of Management and Budget. Bolten is especially close to the president and is a figure of rising influence in the White House. For the 2006 budget, which would be released early next year, Bolten’s office has suggested serious spending cuts in preliminary exchanges with federal departments and agencies. If nothing else, a program of budget austerity would rid Bush of an image he dislikes, that of a big spender.
Fred Barnes is executive editor of The Weekly Standard.
