DEFICIT RIDDLE

The Bush administration gushed over the release of figures recently showing that the budget deficit for this year is expected to be smaller than originally predicted. While this is good news, it is not time for celebration. The smaller deficit is the result of many one-time events that won’t improve the nation’s long-term economic outlook.

The Office of Management and Budget last Wednesday said the budget deficit for 2005 was expected to be $333 billion, not the $427 billion it had predicted in February. The downward revision is due largely to an increase in tax revenues. This, however, does not prove that the administration’s “tax relief plan, our pro-growth policies, are working,” as the president said.

A good chunk of the revenue increase – $50 billion out of a total of $87 billion – is due to a tax in-crease. With the expiration of accelerated depreciation tax cut at the end of last year, businesses paid an additional $50 billion in taxes last year. “The increase in corporate receipts is easily explained as the combined results of last year’s strength in economic activity and a return to a more normal tax levels following the expiration of the depreciation bonus,” investment firm Goldman Sachs wrote last month.

As for the economic growth, the firm said that was mostly concentrated in “nonwithheld taxes” such as interest and dividend income. That means that those with large stock and bond holdings did well, but workers with taxes withheld from their paychecks didn’t see big gains.

Also last year, business were given a one-year opportunity to return corporate profits to the United States rather than hold them overseas to avoid paying U.S. taxes. In 2005, companies can repatriate profits to this country and pay only 5.25 percent in taxes, rather than the usual 35 percent. This is expected to bring in billions of dollars in one-time revenue.

The problem is these are one-time increases and don’t mean that government revenue will continue to increase. That means deficits in future years won’t be much smaller than projected.

Worse, budget projections include no money for the war in Iraq, for operations in Afghanistan or for the war on terror, although these will likely continue to cost hundreds of billions of dollars. An expansion of the Medicare drug benefit, which is estimated to cost $33 billion in 2006 and rise to about $137 billion in 2015, is not included either. Nor is federal money to change the Social Security system as the president has proposed. Beyond these, government spending continues to increase, about 7 percent this year, meaning the gap between government revenues and expenditures is really larger than projected.

While this year’s higher than expected revenues are good news, the higher tax collections cannot be expected to continue. For that reason, any additional tax cuts or extensions of current cuts should not be approved unless it is proven that they will be offset by future revenues.