THE LATEST DEFICIT news is good instead of the usual grim, which is certainly a welcome change. The Bush administration released revised deficit estimates yesterday projecting that the fiscal 2005 shortfall would be $333 billion -- nearly $100 billion less than it had anticipated in February and far below last year's record $412 billion deficit. That followed a similarly upbeat assessment from the Congressional Budget Office, which reported last week that it expects this year's deficit to be "significantly less than $350 billion, perhaps below $325 billion."
The reason for this rosier scenario is an unanticipated surge in tax revenue, with receipts projected to rise a whopping 14 percent from last year's level. But it would be dangerous -- and wrong -- to take this news as evidence that President Bush's tax cuts were wise policy, that the tax cuts should be made permanent or that deficit worries can be safely ignored.
This year's healthy tax take follows three straight years -- the three years after the Bush tax cuts were first passed -- of falling tax receipts. Last year, tax revenue was at its lowest level as a share of the economy in 40-plus years. And even this year's receipts are far less than the administration had projected they would be in 2002. In short, the unexpected increase is good news only in comparison to the disappointing performance of the recent past. The notion that the tax cuts would somehow magically pay for themselves hasn't proved true; instead, taxes have come in far lower than was anticipated when the cuts were passed.
Moreover, there's every reason to think that much of this year's more bountiful tax take could be temporary. A big chunk of the increased revenue comes from the expiration of an investment tax break, a one-time bump-up. Similarly, last year's tax bill created a one-year tax break for multinational corporations' overseas profits; this is also a once-only boost and could reduce tax revenue next year.
The increase in individual income taxes doesn't reflect any big hike in taxes deducted from paychecks. Rather, it comes mostly from "non-withheld taxes" -- takes on income such as big bonuses or capital gains from the sale of stock and houses. This, too, could prove ephemeral. As Goldman-Sachs concluded in a recent analysis, "The fact is that both growth and stock market momentum have cooled in 2005. Thus the strength in non-withheld taxes is apt to fade as well."
CBO Director Douglas Holtz-Eakin has wisely cautioned that the current improvement should be taken "with a grain of salt," adding, "There's simply no question if you take yourself to 2008, 2009 or 2010, that vision is the same today as it was two months ago." But the administration takes this year's good news and assumes that much of it will continue, with extra tax revenue averaging around $80 billion annually for the next five years. Combining that with optimistic assumptions about low interest rates, the administration foresees deficits falling to just over 1 percent of gross domestic product by 2008.
Perhaps that will happen. But if there is a lesson from the faulty forecasts and ephemeral surpluses of recent years, it is the danger of making that gamble. What's certain, meanwhile, are the fiscal pressures that will hit down the road, as the baby boomers begin to retire. This should be the time to be preparing for those costs, not piling on more debt.