Last Thursday, the Administration released its economic forecast that will be used as the basis for its FY 2007 Budget, to be released early in 2006. See the actual forecast summary here, and a transcript of a conference call with CEA Member Matt Slaughter here. It is in general little changed from the mid-session review forecast released 6 months ago.
Even with the hurricanes, the real GDP forecast is up a tenth of a percentage point over the 4 quarters of 2005. That will allow for more revenues relative to expenditures. The "wedge" between inflation in the GDP price deflator (which corresponds most closely to the tax base) and the CPI price deflator (which corresponds to the way government expenditures, like Social Security benefits, are indexed) widened for 2005, with some narrowing forecast for 2006 and 2007. I suspect that energy prices are the culprit--given how much we consume rather than produce (i.e., import). When the wedge gets wider, that suggests faster growth in expenditures than tax revenues, and this will offset to some degree the impact of a higher GDP growth assumption. If the deficit is to come down in the FY 2007 budget relative to past forecasts, most of the work will have to be done by changing taxes and expenditures, not by relying on a more favorable economic picture.
Yesterday, the President was on the road to promote continued extension of some of the soon-to-sunset tax cuts. The ones in question pertain to the tax rates on dividends and capital gains. I find this whole discussion to be disheartening. The first order issue with tax policy is that we are not raising enough revenue to match our expenditures. Making the lower tax rates permanent just makes sure that we will permanently not have enough revenue to match our expenditures, unless we decide to lower expenditures by even more.
That brings us back to the FY 2007 budget. I would be much happier if the President spoke about which expenditures he will cut in that budget with the same specificity that he talks about which tax cuts he'd like to make permanent. Yesterday's road show was not a high point. Consider this:
Bush fell back on campaign-style rhetoric yesterday: "When you hear people say that we don't need to make the tax relief permanent, what they're really saying is, they're going to raise your taxes."I'm prepared to be very unhappy come budget time.
UPDATE: This post was picked up by a Post with a much larger circulation.