If Only the Pigs Had Restrained Themselves

This piece from The Scotsman starts off great, but ends with a sigh:

IT IS one of the big, untold stories of the global economy. America's public finances are improving at last, to the great relief of the White House but to the puzzlement of much of the commentariat, which cannot fathom how tax cuts can possibly go hand in hand with a smaller budget deficit.

The US budget shortfall fell to $35.3bn (£19.4bn) in May, down 43.5% on the $62.5bn seen during the same month last year, thanks to a continuing surge in tax revenues. This year's deficit was the smallest May shortfall since the $27.9bn seen in May 2001, which was also the last year the government ran a budget surplus. This is a much better outcome than almost anybody was forecasting; it follows a series of US tax relief packages between 2001 and 2003, making the lower deficit all the more surprising to most analysts.

This apparent paradox has a simple explanation: President Bush's 2003 tax cuts played an important role in boosting economic growth and share prices; in turn, this triggered an explosion in tax receipts which is now compensating for the revenue lost originally. Of course, there are other reasons why the US economy has bounced back, including the strong international recovery and normal cyclical effects. But there is no doubt that the tax cuts helped a great deal.

Another explanation for why mainstream forecasters got it so wrong is that they attributed the deficit almost exclusively to the president's tax cuts. But the deficit's primary cause was the economy's poor growth after the collapse of the dot.com bubble. President Bush's decision to throw caution and principle to the wind and embark on an astonishing spending binge - much of which had nothing to do with his military or security policies - was an equally important reason.

The deficit could easily be abolished entirely by freezing spending for 18 months or so. Bush now seems likely to meet his campaign pledge to cut the deficit in half as a percentage of GDP by 2009; but if he had the guts and the support of the supposedly conservative Congress, he could easily eradicate the deficit simply by not spending more.

But Bush's and Congress's profligacy remains largely unchecked, with government spending in May hitting $188bn, up 5.7% from the same month of last year. But this was swamped by improved revenues of $152.7bn, up 32.3% from May 2000, led by an exceptional performance from income tax and corporation tax - thanks to, rather than despite, the 2003 tax cuts.