A large unexplained drop in tax revenue, rather than weak economic growth or tax cuts, is responsible for the sharp fall in predicted US budget surpluses in coming years, according to the latest report from congressional economists.
The non-partisan Congressional Budget Office (CBO), which yesterday released its regular update on the public finances, said the drop in revenues in 2002 was the sharpest since 1946. The CBO is now projecting the cumulative surpluses for 2002-2011 at $336 billion (€342 billion), down from its estimate of $1,700 billion in March.
Even the new figure may be biased upwards by the assumption that the tax cut enacted last year will be reversed in 2011, pushing up the surplus thereafter. The White House has said it wants to make the cut permanent.
The CBO's predictions for the surplus are sharply lower than those released by the White House's Office of Management and Budget (OMB) last month. The budget projections have become a source of fierce partisan wrangling in Washington, with the White House accusing Congress of excessive spending and congressional Democrats attacking the administration's tax cuts.
But yesterday's numbers suggested that one of the main reasons for the dwindling surplus was inexplicable and potentially disturbing: that the government was getting far less tax revenue for a given level of economic output, even given recent falls in share prices.
"The drop in the stock market seems likely to have reduced tax receipts from realisations of capital gains," the CBO said. "But the drop in revenues went far beyond what can be explained either by such temporary factors or by the reported weakness of incomes during the recent recession."
In the current fiscal year, the CBO estimated that while newly announced tax and spending changes had reduced tax revenues by $43 billion since their March forecast, and economic developments had been broadly neutral, "technical factors" had cut revenues by a predicted $104 billion.
Economists are unsure about where the shortfall is arising because the Treasury does not receive data on the source of tax revenues until all tax returns are complete. But the CBO was sufficiently concerned that these reductions will be permanent to reduce its revenue forecasts by up to $75 billion a year over the next decade.
Mr Dan Crippen, CBO director, said lower-than-expected revenue accounted for much of the difference between CBO projections and those of the OMB. - (Financial Times Service)
