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The Declining Deficit: An Explainer


President Bush himself announced a drop in the budget deficit today. That's a job usually left to underlings, but the president wanted to make sure the public pays attention to this news.

That's because the new figures show the deficit for the budget year ending September 30th will be $296 billion, much lower than the $423 billion deficit that the White House had predicted in February.

The president said the drop was due to the wisdom of his tax cuts, which resulted in a stronger economy. Critics point out that while it's projected to be lower, we still have a sizeable deficit.

So, are the latest numbers a good thing or a bad thing? Is a balanced budget a desirable thing? Does the budget deficit have you confused? Join the conversation. Give us a call at 800-989-8255. And joining me right now in Studio 3A, NPR's senior Washington editor, Ron Elving. Thanks so much for being with us, Ron.

RON ELVING reporting:

Good to be with you, Lynn.

NEARY: Now, why is the administration so happy about the size of this deficit?

ELVING: I would not go so far as to say the administration is happy about the size of the deficit. It is, after all, a $300 billion deficit. And it is a deficit that we have despite the fact that a few years ago, we had a surplus and we were projecting enormous surpluses for this decade. And it is, of course, the fourth or fifth year in a row that we've had such a deficit, and there's not that much real relief in sight. So there's a good deal of sobering news around this figure.

But, they have a way, they have devised a way to present this in the most positive way possible, which is, after all, what you would expect from anybody in the position the President is in, or that the budget director is in. Find the most positive way to present it as possible.

And, what they have devised is a way of comparing it against an earlier projection. Not an earlier deficit. Not an actual number, but a projection. And back in February, they projected that by the end of this fiscal year - that is by the end of September, this coming fall - we would have an annual deficit just for this one year of $423 billion. Truly an impressive figure.

So this figure now, just five months later, has dropped by 30 percent, and has dropped just under $300 billion. So it can be put forward as a $296 billion deficit, as opposed to a $300 or even $400 billion deficit. That sounds so much better than the scary story that we heard in February that it's playing - or at least the president is trying to make it play - as good news.

NEARY: Okay. And what reasons are being given for the shrinkage?

ELVING: The shrinkage is attributed to faster and richer than anticipated collections, primarily. Income tax projections have been exceeded. Corporate tax projections have been exceeded by even more. So, right now they're projecting that instead of the earlier projected figures, they're going to be up 11 percent, 15 percent - things in that range - compared to what they had expected in February. In other words, they're saying that had a better season than they anticipated. April, the big month for a lot of corporate tax money to come in, for a lot of individual tax payer money to come in. And they're just seeing a little bit more coming in from some of the people in higher incomes. That plays well, too, of course, because the administration's been criticized for lowering taxes too much on business and corporations and on wealthier Americans.

So if they can point to better collections from those very groups, that is another indication that - in their view - their policies are working. They also believe that the economy is running a little hotter than they might have previously thought it was going to. And that, they of course attribute to the policies of the last four or five years, especially the tax cuts from 2001, 2003. And if all of that is accepted at face value, then it would seem to be a success story that is so quickly reducing the deficit from this figure of 423 billion, down under 300 billion. And incidentally, the projection for next year is that it will go up again in 2007, but only by about 40 billion. And that then in 2008 - magically enough in the next presidential election year - it'll drop all the way down below $200 billion a year, all the way down to $188 billion. Hallelujah.

NEARY: Still high.

ELVING: Still high if you compare it to surplus. And then we get into the question of how high is high? This particular budget deficit is 2.3 percent of the gross domestic product. Two-point-three percent. That's a relatively low figure. In fact, it's lower than the percentage figure for the budget deficit in 17 of the last 25 years. That's pretty good.

NEARY: I hope everybody is still with us now.

ELVING: Well, I know that was a lot of numbers, Lynn, in rapid succession.

NEARY: I know people get lost sometimes when you start talking about deficits in the budget, and so…

ELVING: And percentages.

NEARY: …we called on people to send in some of their questions via e-mail, and I have a few of those e-mails here. So let me begin. This is an e-mail from Mark(ph) in Lansing, Michigan. “Could you please explain about those expenditures that are off-budget, if I used the correct term, or other spending that does not appear in the budget? How does this affect the calculations of total national debt, etc.?”

ELVING: That's an excellent question, and I'll try to give an answer without becoming too numerical.

NEARY: Okay.

ELVING: Over the years, the federal government has had on-budget and off-budget expenses. We also have something that's called the discretionary budget, and the mandatory spending budget. One of the things that are mandatory is to fulfill all of the so-called entitlement programs: social security. You don't hear many people saying we spend less money on social security. Medicare, also something of a sacred cow. These kinds of entitlements are part of the budget and are not part of the budget, depending on which way you're looking at it.

And there are also some other expenditures that are not necessarily part of the federal budget deficit in a given year, but do accumulate in the long run as part of the overall federal debt.

And let me just say - by way of explanation - the deficit is a one-year figure, whereas the federal debt is the accumulation of all federal deficits back to George Washington.

NEARY: Right. Which people get confused about. A follow-up here to that, from William in San Antonio. “Are the costs of the Iraq and Afghan wars included in the reported deficit figure, or are these off-budget items funded entirely by debt but not included in the official budget deficit numbers?”

ELVING: In the budgeting that Congress and the President do, the costs of the war are, let us say, underrepresented, and that larger amounts are then spent for Afghanistan and Iraq, and other things - emergency spending such as Hurricane Katrina - in what are called supplemental emergency appropriations bills that are not part of the regular budget.

However, that spending ultimately does become part of the revenue versus expenditure stream, so it does show up, eventually, in the federal budget deficit figures. And certainly, it's reflected in the total federal budget debt.

NEARY: Okay. I think we have time for one more question. “How much of the deficit reduction is coming from record oil profits?”

ELVING: There have been very high profits in the oil industry in recent months, and that is a contributing factor, surely, to the increased corporate tax collections. What the percentage is, I couldn't say.

NEARY: All right. Well, thanks so much for being with us today, Ron.

ELVING: My pleasure, Lynn.

NEARY: Ron Elving is NPR's senior Washington editor, and he joined me here in Studio 3A.

Coming up, your letters, and I want to remind you that you're listening to TALK OF THE NATION from NPR News. Transcript provided by NPR, Copyright NPR.