Green-eye-shade types are certainly having their day in the sun. First it was Enron's creative bookkeeping that sparked interest in accounting. Then it was Arthur Andersen's auditing of Enron, something of an exercise in blind faith, that gave the profession new panache. Finally the US government's budget forecasts are coming up for review.
In a 12-month span, some US$4 trillion -- on paper -- -- vanished from the 10-year federal budget surplus estimate. Between January 2001 and January 2002, the Congressional Budget Office sliced its cumulative 2002-2011 projected surplus from US$5.6 trillion to US$1.6 trillion.
A disastrous tax season, with April non-withheld individual tax receipts down some US$70 billion from last year, prompted the Treasury to unveil the bad news on Monday. Instead of paying down US$89 billion in the second quarter, as expected in January, the Treasury will borrow a net US$1 billion this quarter. It's the first time Treasury will be a net borrower in the second quarter, when April tax receipts flood its coffers, since 1995, according to Ward McCarthy, economist and managing director at Stone & McCarthy Research Associates in Princeton, New Jersey.
The magnitude of the swing -- US$90 billion -- from the preliminary to the revised estimate "was exceeded only once before, in the third quarter of 2001," McCarthy says.
The Treasury's announcement of its second-quarter borrowing requirement -- and preliminary estimate of US$55 billion for the third -- caught Wall Street off guard.
"It was somewhere between a big surprise and a huge surprise," says Lou Crandall, chief economist at Wrightson & Associates. "For me it was a huge surprise."
The sluggish tax take suggests another downward adjustment, albeit modest, when the Congressional Budget Office releases its mid-year budget outlook in July, according to Crandall.
The Democrats, busy readying their passion play, "Who lost the surplus?" for the 2002 mid-term election, are unlikely to wait that long. With the slipping surplus a rip-roaring campaign issue, "someone in the Senate is likely to request a revised estimate, given the magnitude of the miss," says Susan Hering, senior US economist at UBS Warburg.
At this point, total personal tax collections are running 57 percent of what CBO expected for fiscal 2002, which ends on Sept. 30, Hering says. "Last year, after April personal tax collections amounted to 66 percent of the fiscal year total."
The source of the forecast error was the stock market; specifically, the rise in personal income taxes from equity-related income. The extraordinary bull run of the late 1990s produced a tax windfall for the Treasury, the result of capital gains and income from the exercise of stock options. Individual income tax revenue as a share of GDP rose to a record 10.3 percent in 2000 (a projection, since the latest IRS data are from 1999).
"CBO assumed that the ratio of individual income tax receipts to GDP would remain stable over the next decade," Bob Barbera, chief economist at Hoenig & Co in Rye Brook, New York, wrote back in October 2000. If tax receipts as a share of GDP retreated to the 30-year average of 8.5 percent, the CBO's 10-year revenue projection would fall by US$2.2 trillion, he said at the time.
Taking into account higher interest payments from the bigger deficit, Barbera saw the chance for a US$3 trillion shortfall in the surplus.
While many things can happen between now and 2011 -- which is why 10-year forecasts must be taken with the huge grain of salt -- in the short-term Barbera looks to have ferreted out the big boo-boo in the CBO forecast.
"Congress sold us a view of the world as a US$5 trillion surplus," Barbera says. "It was a world with a perpetual boom, a permanent peace and nonstop bull market revenues. It was the irresistible nature of the boom. Congress bought into it as well as [Henry] Blodget and [Mary] Meeker."
The Democrats will have you believe it was the tax cut that put the federal government back into deficit in 2002 following four consecutive annual surpluses from fiscal 1998 through 2001.
The Republicans would prefer to have us believe that it was the economy, stupid -- an economy, as well as a saying, they inherited from the Clinton administration.
Barbera says the real culprit was the stock market.
Congress wasn't the only policy-making body to buy into the Endless Surplus forecast. Federal Reserve Chairman Alan Greenspan took the bait -- hook, line and sinker.
Greenspan, long an advocate of deficit reduction uber alles, had an epiphany after Republican George W. Bush took up residence in the White House. Greenspan told the Senate Budget Committee that tax cuts were necessary because within the next five years, there would be no government debt to buy. That would put the government in the unpalatable position of having to buy private assets with burgeoning surpluses.
Long wary of any 10-year budget forecast, Greenspan threw caution to the wind and advocated tax cuts. A less skilled performer would have had trouble keeping a straight face.
Congressional Democrats may want to subpoena the Fed chairman, as they always do on fiscal policy matters, when they start apportioning the blame.
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