WASHINGTON – The 2006 federal deficit will be lower than expected, thanks to added tax revenue, President Bush said Tuesday.
Additional revenue generated from groups that pay their taxes quarterly — primarily corporations, small businesses and the wealthy — dropped the projected federal deficit for the 2006 budget year to $296 billion, a $127 billion decrease from a February estimate, Bush said.
The president said his pro-growth policies, including tax cuts passed in 2001 and 2003 and a limit on additional discretionary spending, had enabled the economy to improve tax revenues to the point that his 2004 pledge to cut the deficit in half — to $260 billion by 2009 — will be reached one year early.
"We cut rates for everyone who pays income taxes. We reduced the marriage penalty. We doubled the child tax credit. And we cut the death tax. We cut the tax paid by most small businesses because we understand that most new jobs are created by small businesses. And we encouraged economic expansion by cutting taxes on dividends and capital gains," Bush said.
"Together, these tax cuts left nearly $1.1 trillion in the hands of American workers and families and small-business owners. And they used this money to help fuel an economic resurgence that's now in its 18th straight quarter of growth," he said.
"With the help of the president's successful pro-growth policies, the 2006 deficit is 30 percent lower than originally expected," reads the White House mid-session review.
Economic growth includes a 3.5 percent rate in 2005 and a first-quarter growth rate in 2006 of 5.6 percent. The economy is expected to end the year with 3.5 percent growth. Unemployment stands at 4.6 percent, with 5.4 million new jobs added since August 2003.
The numbers for this year, however, aren't as impressive as last year, when tax collections increased $274 billion, or 14.5 percent. Bush said the Treasury predicts tax revenues for this year will grow by $246 billion or 11 percent. Corporate taxes are rising at a 19-percent rate.
"We've had extraordinarily good profit growth, and when you have better profit growth than wage growth you tend to have windfall tax revenues because taxes on profits are higher than taxes on wages," said Diane Swonk, chief economist for Mesirow Financial, a Chicago-based financial services firm.
So far, revenues are $115 billion higher than expected when the budget was set. Swonk predicted that the unexpected revenue surge would ease around the end of the year as profits peak.
Last budget year, the federal deficit was $318 billion. That number was expected to increase this year as a result of emergency supplemental spending on the Iraq war and Gulf Coast hurricane recovery.
Calling the numbers a "concocted victory lap," House Minority Whip Steny Hoyer, D-Md., released a statement saying the budget deficit "would constitute the fourth largest deficit in American history."
"The increase in revenues to the Treasury is largely attributable to record corporate profits, not a roaring economy that is benefiting American taxpayers who are facing exploding gas price, skyrocketing health care costs and rising college tuition costs," Hoyer said.
Though numerically the budget deficit is among the highest recorded, as a measure of gross domestic product, 2.3 percent, it ranks lower than the deficits in 17 of the past 25 years.
Bush said the short-term deficit has been a challenge, but the real threat of overspending comes from unsustainable growth for entitlement programs — Social Security, Medicare and Medicaid
"They are important programs, but the spending for these programs is growing faster than inflation, faster than the economy and faster than our ability to pay for them," Bush said, adding that it's time to stop "playing politics."
He said newly-sworn in Treasury Secretary Henry Paulson wants to work on these issues.
The president also suggested that the Senate pass the line-item veto bill that has already been approved by the House of Representatives. He said that authority will enable him to "interface effectively with the legislative branch" to strip out wasteful spending from the budget.
"When legislators think they can slip their individual items in the spending bill without notice, they do it. If they think that they're going to try to slip something in and it gets noticed, it means they're less likely to try to do so," Bush said.
Bush has had few opportunities to boast about the deficit over the course of his time in office. He inherited in 2001 a surplus estimated by both White House and congressional forecasters at $5.6 trillion over the subsequent decade, and it quickly dwindled.
Those faulty estimates assumed the late-1990s revenue boom — fueled by the stock market and dot-com booms — would continue. But that bubble burst, and a recession and the Sept. 11, 2001, terrorist attacks started a flow of red ink. Several rounds of tax cuts, including Bush's signature $1.35 trillion tax cut in 2001, had the temporary effect of lowering payments to the Treasury and contributing to deficits four years ago, after four years of budget surpluses.
Even before the release of the figures, critics poked at the White House figures, citing, for example, how they are at odds from Bush's original budget released in 2001, which predicted a $305 billion surplus for the current year, even after accounting for tax cuts.
"The deficit's probably going to be in the range of $300 billion and that still represents a swing of about $600 billion from what was projected in 2001," said Rep. John Spratt Jr. of South Carolina, the top democrat on the Budget Committee. "You've still got triple-digit deficits for as far as the eye can see."
Some budget experts say the steep rise in tax receipts looks more impressive than it really is since revenues are bouncing back from a three-year decline during Bush's first term, drops not seen since the Great Depression.
"The current so-called revenue surge is merely restoring revenues to where they were half a decade ago," said Robert Greenstein, executive director of the liberal-leaning Center on Budget and Policy Priorities think tank. That's after accounting for inflation and population growth.
Still, the new figures are "a testament" to the American worker and a dynamic U.S. economy, said Senate Majority Leader Bill Frist.
"The grit and spine of the American worker, and an indefatigable entrepreneurial spirit, have kept our economy resilient despite corporate scandals, Sept. 11, and hurricanes Katrina and Rita. ... But we cannot rest on the progress made to date," Frist, R-Tenn., said. "As we strive to achieve fiscal balance, more needs to be done to help hardworking families meet the cost of living.”
The Associated Press contributed to this report.