from Follow the Money

Rhetoric that runs ahead of reality

May 19, 2005

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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Budget, Debt, and Deficits

I noticed that the US Treasury statement that accompanied the foreign currency report adopted the rhetoric of shared sacrifice.

We are not bashing China in lieu of tackling our own problems; we in the US are committed to reducing our deficit and raising national savings.

The problem: the policies to back the rhetoric aren’t there, and most of the world knows it.

The much-touted partial privatization of Social Security won’t raise national savings so long as it is financed by debt, not cutting CURRENT benefits or raising CURRENT taxes. As best, it is neutral; at worse, it might lead national savings to fall. Gutting the one part of the government with a cash-flow surplus for the next ten years hardly seems likely to improve the federal government’s overall finances.

The "on-budget" fiscal deficit does look likely to fall a bit this year. Alas, it seems to be falling for the same reason why the overall current account deficit is rising. The real estate boom that is driving up investment in residential properties and fueling consumption growth also seems to be contributing to the Federal government’s tax coffers. Tax revenues seem to have outperformed in part because of capital gains on real estate (and also on the equities). In an asset-based economy, it increasingly seems that tax revenues are quite pro-cyclical, rising more than expected in good times and falling a bit more than expected in bad times. The revenues from the amnesty (actually a low tax rate) on the repatriation of profits probably helped too.

The current fiscal improvement risks being a one-off, particularly if the Congress keeps on spending and all the tax cuts are made permanent. And even if real-estate fueled consumption growth continues to help keep the deficit down for a while longer, that won’t exactly reduce the US need for foreign savings. And the longer-term outlook is not pretty if the tax cuts are made permanent.

Nice words from the Treasury, but little credibility.

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