The 2006 federal deficit pleasantly surprised. From The Wall Street Journal (page A2 in the print edition):
Strong tax receipts from individuals and corporations helped to shrink the U.S. budget deficit for the fiscal year ended Sept. 30 to $248 billion, far narrower than the $423 billion previously projected by the White House...
The 2006 deficit narrowed in large part because the growth in spending was offset by surging tax receipts, which reached $2.4 trillion, up 12% from $2.15 trillion, the Treasury said. The biggest surge came from corporate income taxes, which increased 27% to $354 billion as corporate profits skyrocketed. The single biggest chunk of tax revenue came from individual income taxes, up 13% to $1 trillion, largely fueled by wealthy individuals, who benefited from higher salaries, bonuses and stock-market gains.
As usual (and appropriate), that bit of sunshine comes with a warning that you should not get too comfortable with that warm and fuzzy feeling:
While the deficit shrank in fiscal 2006, the White House and many economists expect it to widen again this fiscal year as revenue growth slows and spending continues to increase. The costs of entitlement programs are growing faster than the government's ability to pay for them, and government debt payments, which totaled $406 billion in fiscal 2006, are also rising.
That particular fact is no surprise, but writing on the opinion page of today's Journal the Cato Institute's Chris Edwards and Jagadeesh Gokhale say it is not just the federal government:
State and local governments are amassing huge obligations in the form of unfunded retirement benefits for their workers. Aside from underfunded pension plans, governments have also run up large obligations from their retiree health plans. While a new Governmental Accounting Standards Board rule will kick in next year and reveal exactly how large this problem is, we estimate that retiree health benefits are a $1.4 trillion fiscal time bomb...
To put these costs in context, consider the explicit net debt of state and local governments. According to the Federal Reserve Board, state and local credit market debt has risen rapidly in recent years, from $313 billion in 2001 to $568 billion in 2005. But unfunded obligations from state and local pension and retiree health plans -- about $2 trillion -- are still more than three times this net debt amount.
Experience tells me that the Edwards and Gokhale suggestion for fixing the problem won't please everyone...
The only good options are to cut benefits and move state and local retirement plans to a pre-funded basis with personal savings plans...
State and local governments also need to cut retirement benefits, which were greatly expanded during the 1990s boom. From a fairness perspective, cutting benefits especially of younger workers is reasonable given the generosity of state and local plans.
... but it's hard to ignore the warning.
UPDATE: pgl reacts to the Journal report at Angry Bear, and to my post of a few days ago adding: "If David’s point is that the unified budget must be balanced in the long-run, he’s right." Yep -- that's my point, and on this there is no disagreement between us.