CBO Forecast Shows Runaway Spending?Not Tax Cuts?Causing Deficits

Fiscal Fact No. 18

The federal budget projections released January 25, 2005, by the Congressional Budget Office (CBO) show that runaway spending, not insufficient tax revenues, remains the cause of today’s nagging budget deficits.

While much of Washington’s attention will be on the $368 billion deficit that CBO projects for 2005, the real story is CBO’s forecast of tax revenue collections. CBO estimates that federal tax revenues will total $2.057 trillion for FY 2005—$177 billion more than was collected last year, an increase of 9.4 percent.

This surge of new tax revenues for the federal Treasury is having a limited effect on lowering the federal deficit because spending continues to grow at a relatively rapid pace. CBO projects FY 2005 outlays to top $2.425 trillion, a 5.8 percent (or $133 billion) increase above last year’s level.

This growth rate is two and one-half times the rate of inflation and excludes any forthcoming appropriations for the war in Iraq. If spending were held to the rate of inflation rate this year (2.4 percent), the budget deficit could be trimmed to $290 billion, rather than the projected $368 billion.

Looking at the revenue and spending patterns over the past four years also puts to rest any notion that the Bush tax cuts were the principal cause of today’s deficits. As the table below shows, federal tax revenues will be $66 billion higher in FY 2005 than in FY 2001, Bill Clinton’s last fiscal year. By contrast, total federal spending has increased $562 billion since FY 2001, a jump of 30 percent in just four years.

Since 2001, the budget has gone from a surplus of $128 billion to a deficit of $368 billion—a swing of $496 billion. As the above table also shows, in the absence of new spending, the increase in tax revenues would have improved the government’s financial picture. However, the increase in federal spending completely overwhelmed the benefits of these new tax revenues.

For more information, contact Scott A. Hodge at (202) 464-5103 or hodge@taxfoundation.org.