US(SR) 6-year budget plan not very convincing - disturbing fine print

Friday, April 22, 2005

Before the downfall of the communist USSR economists regularly exchanged jokes about the gap between the Soviet regime's ambitious 5-year economic plans and the sad reality. A closer look at the 6-year budget plan of the White House could have the same effect, weren't it for the worrisome implications for the rest of the globe that does not exactly energize the houmorous part of the brain.
The longer term outlook, compiled by the Office of Management and Budget (OMB) in the White House, leaves the impression that the promise to halve the deficit by 2008 is nowhere taken seriously, except for the president's spokesmen who preach this mantra, ignoring the data given in the White House 6-year forecast. Please pay attention to the last footnote of this summary and its possible implications described at the end of this post.
This year's nominal GDP growth is estimated at 5.8 percent. Growth expectations for 2006 are anticipated marginally lower at 5.6 percent. For the following years up to 2010 growth estimates decrease one tenth of a percentage point every year whereas the deflator is forecasted on average with 2.4 percent. Oil prices have definitely spoiled this Soviet-style statistical optimism, proven by the fact that inflation averaged 3 percent in 2004 already and the latest numbers have been pointing to an acceleration of this trend. The Congressional Budget Office (CBO) estimates inflation still lower with an average of only 2.2 percent from 2005 to 2010, overshooting even the president's official optimism.
Attack on citizens wallets
Nevertheless the Bush administration sees high government revenue growth. Receipts in 2005 are expected to come in at 2.053 trillion $. That is 9.2 percent more than in 2004. Outlays for this period are seen increasing at an annual rate of 8.2 percent to 2.479 trillion, leaving the nation with a deficit of 427 billion.
In the following years the slogan seems to be "never mind the warnings of the Federal Reserve," which does not get tired to lament that the skyrocketing debt puts the US at considerable risk by getting ever more dependent on foreign savings. With a reduction of the budget deficit from last year's 412 to 251 billion dollars in 2008 this government already admits it won't meet its targets, which were anyway set at a quite feeble level. Aren't Republicans supposed to be more tightfistedt when handling taxpayers monies?
The Bush-approved figures forecast a steady revenue growth of around 7 percent for the years he will be in charge. National outlays are dressed down to annual growth rates of slightly less than 4 percent, mostly by maintaining the political bias against the economically weak.
Fiscal policy puts the burden mainly on American citizens while business is favoured at all costs, the figures indicate. In 2007 the acting president and his advisers will for the first time ever pull more than a trillion dollars out of peoples wallets. The growth expectations for income derived from taxing individuals hovers between 8.2 and 10.8 percent per annum for the remainder of Bush's term. In absolute terms that is roughly a 100 billion more every year.
Tax success for business lobbyists
Corporations will be relieved to see the forecasted decreasing intake in the form of company taxes. After a projected spike of 19.6 percent in the current fiscal year to 226.5 billion they can look forward to see a reduction of 2.7 percent in 2006. A couple of million for the lobbyists in Washington can result in billions of savings for companies, it appears.
Worth pointing out is also the fact that the proportion of corporate tax revenues compared to individuals taxes is decreasing at a fast pace. While corporation's contributions amount to 25.3 percent of individuals tax payments this year, their share will have fallen to 20.8 percent when this president goes out of office in 2008.
Bush's tax cuts will leave a nasty legacy for his successor in the White House. According to the OMB figures the tax cuts on dividends and capital gains from 2001 and 2003 will save this affluent clientele and small business owners 53.4 billion during his current term. But his successor will miss a staggering 1.036 trillion dollars from 2009 to 2015. Half of these tax cuts will benefit wealthy coupon clippers and inheritors and burden future budgets to a yet unknown extent.
Rising interest rates can turn into a disaster
In the last 23 years the US was seen as a reliable debtor, backed by the world's biggest and most innovative economy. Based on the unilateral aggression on the side of the US in Afghanistan and Iraq and the saber-rattling towards Iran and North Korea this could change. Looking at the 390 billion - and still expanding - budget of the Pentagon, one begins to wonder whether all foreigners are going to continue to support the US war machine at the same pace as in the past. It once could be turned against them. There are American military installations in more than 130 countries around the world. To quote Winston Churchill, "A nation's friends may change, but never its interests."
Suppose the Arab allies would stop to change their petrodollars into US Treasuries, big uncle Sam might be forced to change his mind rather quickly. US military bases in Saudi Arabia, now seen as a factor of stability, could be used to violently secure the flow of the black gold if relations worsen. Looking at the growing hostility against the US in many parts of the world, such events cannot be excluded anymore. I am not talking about tomorrow, but seeing tensions erupt all over the world these days (EU constitution, anti-Japanese protests in the Far East, Ecuador) on national and international levels that looked almost unimaginable a short time ago, we certainly are in for more negative surprises at the political front. Saudi Arabia has a bigger problem with terror than any other place. In the end every political struggle is about redistribution of wealth.
But it does not have to come to such a disastrous development to generate problems yet unknown for the US. Rising interest rates might be enough to push the US deficits and the economy over the cliff. Again the assumptions of the presidency are very tame. Ten year treasury paper, yielding 4,24 percent on Friday, is seen at a yield of 4.6 percent by year-end. The longer term forecast of a slow rise to 5.5 percent in 2008 may be very convenient for the purpose of drafting a deficit reduction, but might be far off from harsh economic realities the nation faces because of the twin deficits. The forecasts for 3-month T-bills are out of date as well with a rate of 2.7 percent for 2005, that rises to only 4 percent at the end of Bush's term. Given the latest speeches of Fed members there are higher rates on the way, although it is to be questioned how much room there really is, as can be observed on the softening stance about the solidness of growth. Higher inflation is inevitable as higher oil prices have already creeped through to producer prices, as the latest data shows.
A footnote could translate into hyper-inflation
Despite the lip-service towards attaining more budget discipline, gross federal debt will mushroom 24 percent to 9.9 trillion dollars until 2008 from a current level of 8 trillion and surpass the 10-trillion mark in 2009. Only 23 years ago the US was a net lender. History will credit president Bush with the fact that debts will have risen 74 percent during his two terms, if he performs to his own 6-year plan. No president before him ran up such a massive debt. Now the USA are the most indebted country in the world; but they are in the lucky position to pay the debts with their own money.
In this context the last footnote on the last table is highly disturbing. According to it the Federal Reserve banks held 700 billion dollars of federal securities at the end of 2004 and the public held 3.595 trillion in such papers. "Debt held by Federal Reserve Banks is not estimated for future years," it states dryly in small print. Since the Federal Reserve Banks print the money in circulation and sell it to the Treasury Department in exchange for government debt paper this could imply that the money-printing press will rotate faster and faster in the near future as this enables the government to turn to Fed banks as a lender of last resort with unlimited amounts of money - as long as they do not run out of ink and paper. Please read this and this and this post to get a better understanding of this matter that could result in a massive confidence crisis in the dollar and result in hyper-inflation.
For future reference - and to hold the administration accountable - here is a PDF-version of the longterm budget proposals. If somebody can point me to or send me such a 7-year plan beginning in the years 1999, 2000, 2001 and 2002, I would be very grateful to be able to compare the former forecasts with the actual outcome.

1 comment

Raayat said...

I assume you are looking for the archives on GPOAccess? There is a "summary tables" section, which has the information I believe you seek. Here are links for 1999 (section VII, table S-1), 2000 (section VII, table S-1), 2001 (section VI, table S-1), and 2002 (section IV, table S-3).

01 May, 2005 10:27

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