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220 IRET Congressional Advisory 1 (2007)

handle is hein.taxfoundation/iretcgadv0217 and id is 1 raw text is: INSTITUTE FOR RESEARCH ON THE ECONOMICS OF TAXATION IRET is a non-profit 501 (c)(3) economic policy research and educational organization devoted to informing the public about policies thait will promote growth and efficient operation of the market economy. February 16, 2007 Advisory No. 220 THE PRESIDENT'S BUDGET SUBMISSION FOR FISCAL YEAR 2008 President Bush has submitted his proposed Federal Budget for Fiscal Year 2008. It forecasts a balanced budget by 2012, while extending the major elements of the Bush tax cuts. Achieving budget balance would depend on a continuation of the economic expansion and a reduction in the rate of growth of federal spending. One can disagree with specific spending recommendations, but the focus on spending restraint rather than tax increases is the right approach. Indeed, the task would be easier if spending had not been allowed to explode over the past few years. It is up by more than 50 percent, excluding debt service, between 2001 and 2007, which is nearly a third in real terms. The President's budget includes permanent extension of the 2001 and 2003 tax cuts and expansion of tax-favored saving and education accounts. It includes a new standard deduction for people who purchase health insurance (offset by ending the tax exclusion of employer provided insurance). The budget provides for only a one year fix of the alternative minimum tax (extending the temporarily higher AMT exempt amount, adjusted for another year of inflation). Without it, the AMT would affect about 23 million taxpayers in 2007 instead of only 8 million. Beyond 2007, the number could jump to 29 million in 2008 and nearly 40 million in 2010. Revenues, which have been rising at double digit rates for two years, are projected to grow at only 5.6 percent going forward, in line with nominal GDP growth through 2012, and to hold steady at about 18.3% of GDP, roughly the 40 year average. This is a conservative assumption, given that real bracket creep would normally raise revenues a bit faster that GDP over time. It also assumes, perhaps too glumly, that we have already seen the full revenue feedback from the dividend and capital gains relief of 2003. To achieve balance, the budget would hold the rate of federal spending growth below the rate of growth of GDP. Outlays would slip from 20.3 percent of GDP in 2006 to 18.3 percent in 2012. Discretionary non-defense spending growth would be held to less than the rate of inflation. The budget includes money for the wars in Iraq and Afghanistan for two years. It proposes steps to trim the expansion of Medicare, Medicaid, and SCHIP (state children's health insurance program). The Medicare proposals would eliminate about a quarter of the projected unfunded liability in that program, but much more work would remain. Economic assumptions The budget outlook depends on its economic assumptions. The Administration assumes continued real economic growth averaging 3 percent (the most critical assumption) between 2007 and 2012 (dipping just below 3 percent in 2011 and 2012), with CPI inflation averaging 2.4 percent. The inflation assumption is higher than the Federal Reserve's comfort zone. The 3-month Treasury bill interest rate is forecast to average 4.4 percent, and the ten- year Treasury bond rate to average 5.2 percent. By comparison, the CBO January forecast has a bit less real growth - 3 percent in 2008-2010, dropping to 2.7 percent in 2011 and 2012 - with inflation averaging 2.2 percent through 2012. The Blue Chip a~em km A * * gg~ 8 ~gg

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