http://www.nationalreview.com/kudlow/kudlow200410181252.asp
October 18, 2004, 12:52 p.m.
And the Budget Says . . .
.. . . the supply-siders were right all along.
Is there more sanity in the federal budget than people think?
The latest budget numbers closing out fiscal year 2004 show slower
spending growth, stronger tax receipts, and a $413 billion deficit
that came in about $100 billion less than the Office of Management and
Budget predicted at the start of the year and $64 billion lower than
the Congressional Budget Office estimate.
Overall, according the Treasury Department, tax receipts increased 5.5
percent in fiscal year 2004 compared to a 3.8 percent decline in
fiscal year 2003. Income-tax withholdings gained 2.5 percent versus a
loss of 2.2 percent in the prior year. Corporate tax collections
exploded 43.7 percent on the shoulders of near-record corporate
profits.
What's going on? It's clear: At lower marginal tax rates, the rising
economy is throwing off a lot more tax revenues. Score one for the
supply-siders.
Overall budget outlays increased 6.2 percent in the recent fiscal
year, which is less than last year's 7.3 percent. Excluding spending
for defense and homeland security, as well as entitlements for
healthcare and Social Security, domestic discretionary federal
spending increased by a very moderate 3.4 percent in fiscal year 2004.
If you remove net interest, then the budget increase was only 3
percent — just a bit higher than the inflation rate.
As a share of gross domestic product, the deficit came in at 3.5
percent. That's the same fraction of national income as last year.
This deficit share of GDP is also lower than Europe's and only about
one-third of Japan's. This is more than acceptable. In the early 1980s
the deficit share of the economy was over 6 percent, but that didn't
stop the Reagan boom, which followed large-scale tax cuts and
deregulation measures.
Believe it or not, there are still people out there who cling to the
view that deficits drive up interest rates. How can they justify that
when the current interest rate structure is at a 45-year low with the
Treasury-bond yield around 4 percent? In fact, the 10-year note was
yielding around 6 percent in 2000 when the budget was throwing off
unwise and unusually high surpluses that drained the economy of
private sector resources.
The point is, deficits don't drive up interest rates, and at current
levels they are not damaging the economy as many pundits and
politicians might lead you to believe. That said, there is certainly a
strong case to be made for greater budget discipline in Washington.
It's clear from the debates and the campaign trail that neither
President Bush nor Senator Kerry has a comprehensive plan to limit
budget spending. Kerry has committed to roughly $2.5 trillion in new
spending, which he will be disappointed to learn will not be covered
by his $600 billion to $800 billion worth of tax-hike proposals. More,
slower economic growth under a higher-tax economic policy will throw
off fewer tax revenues. In short, the Kerry plan looks like a super
budget-buster.
Bush has a number of spending proposals himself, especially for
healthcare and education. Then there is the as-yet-unknowable spending
necessary to finance national security in the global war against
radical Islamist terrorism.
But the interesting fact to come out of the new budget numbers is that
neither spending nor deficits are as bad as the critics have warned.
Most in the fraternity of so-called Washington budget experts never
acknowledge this, but a low-tax, high-growth economy, coupled with
budget spending limits, is what will move us back to balance in the
years ahead.
Spending aside, this has been the Bush plan all along. Over time, you
have to believe that a Republican president acting with GOP majorities
in the House and Senate will move toward at least some measurable
budget restraint.
There's no question that clear budget policy rules to limit federal
spending would be wise pro-growth policy. Nor is there any question
that entire departments, agencies, commissions, and unworkable and
overlapping programs should be abolished in a thorough-going federal
government restructuring. Corporations have done this time and again
over the past two decades. Why can't Uncle Sam?
— Larry Kudlow, NRO's Economics Editor, is CEO of Kudlow & Co. and
host with Jim Cramer of CNBC's Kudlow & Cramer.
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