"When I left the Senate, we were on a trajectory towards a balanced budget."
George Allen on Saturday, July 21st, 2012 in a debate.
George Allen says U.S. was on path to balanced budget when he left the Senate
Republican George Allen says the federal budget was in decent shape when he left the U.S. Senate in January 2007.
"When I left the Senate, we were on a trajectory towards a balanced budget," Allen said during a July 22 debate in Hot Springs with Democrat Tim Kaine, his opponent for the U.S. Senate.
Kaine has repeatedly criticized Allen for casting votes during his term in the Senate that helped turn a budget surplus Allen inherited into deficits. We were curious whether Allen’s response -- that the nation was on a course towards a balanced budget at the end of his term -- is correct.
When Allen came into the Senate in January 2001, the government was running its fourth straight fiscal year of surpluses, taking in $121 billion more than it was spending and paying down the federal debt, then valued at $3.3 trillion.
In fiscal 2002, the U.S. began its current streak of running deficits. The economy slowed that year, and a number of measures that Allen backed during his term contributed to the red ink: two foreign conflicts, tax cuts and the expansion of Medicare to cover prescription costs.
The deficit swelled to $413 billion in fiscal 2004 and contracted to $161 billion in fiscal 2007, when Allen left the Senate after an election defeat.
The Allen campaign, in a website post, cited the steadily declining deficits from 2004 to 2007 as proof of Allen’s statement that the U.S. was heading towards a balanced budget at the end of his term.
The campaign also cites budget projections released by the nonpartisan Congressional Budget Office in January 2007, shortly after Allen left office. The CBO predicted that deficits would gradually diminish and the budget essentially would be balanced in 2011 and produce a surplus in 2012 and afterwards.
But there’s an important caveat that the Allen campaign glosses over. CBO projections are made with an assumption that policies currently in effect will not change. And when the CBO released the report cited by Allen, major tax cuts approved under President George W. Bush in 2001 and 2003 were scheduled to expire at the end of 2010. The Bush tax cuts have since been reset to end at the end of this year.
Allen, in his unsuccessful 2006 campaign against Democrat Jim Webb, repeatedly called for the Bush tax cuts to be extended permanently, a position he has strongly maintained in this year’s race against Kaine.
In other words, Allen’s proof that the U.S. was on a trajectory towards a balanced budget when he left the Senate relies on ending the Bush tax cuts -- an action that he has long opposed.
We wondered what would have happened if Allen had gotten his way and the tax cuts were permanently extended during his term. Would the U.S. have still been on a path towards a balanced budget when Allen left the Senate? Let’s examine this through the lens of January 2007, the final month of Allen’s term.
Back then, the nation was in its fourth month of a fiscal year that would produce a $161 billion deficit. The CBO was projecting improvement to a $170 billion surplus for 2012. But pivotal to the nation returning to black ink was $332.2 billion in added revenues from the expiration of the Bush tax cuts.
If the tax cuts had been made permanent, the U.S. would have been heading towards a $162.2 billion deficit in 2012. The red ink would have grown to a $242.7 billion in 2016, according to CBO figures, before falling slightly to $210.7 billion in 2017. So in terms of raw dollars, the deficit would have been expected to slowly increase during the 10 years after Allen’s departure if the Bush tax cuts had been made permanent.
Many economists say the best way to compare deficits through history is to measure them against the Gross Domestic Product -- the market value of all goods and services produced by a nation. The comparison to GDP provides a gauge of a country’s ability to absorb its deficit.
In fiscal 2007, the U.S. deficit that was 1.2 percent of its GDP. A computation of figures in the CBO report issued that January show that if the Bush tax cuts had been made permanent, the deficit would have dropped to 0.9 percent of GDP this year, risen to 1.2 percent next year and leveled at 1.1 percent in 2014 and 2015, risen to 1.2 percent in 2016 and dropped to 1 percent in 2017.
So if the Bush cuts had become permanent before Allen left the Senate, little long-term change would have been expected in size of the deficit compared to the GDP.
Of course, many of the numbers bandied about in 2007 seem now rosy in the light of the $1.3 trillion U.S. budget deficit expected this year. Hindsight is perfect, and back in 2007 the CBO couldn’t predict collapses in the housing and financial markets that led to the Great Recession.
Allen, trying to refute charges he voted to run up federal deficits, said the U.S. was "on a trajectory towards a balanced budget" when he left the Senate in 2007.
Allen’s campaign cites a 2007 CBO report that said Washington was on the road to budget surpluses, starting in 2012. But those projections were based on the assumption that the Bush tax cuts would end as scheduled in 2010. And Allen has maintained since at least 2006 that the tax reductions should be made permanent.
Had Allen prevailed on the tax cuts, figures in the 2007 CBO report point to the deficit slowly rising in raw dollars over the next eight years. The deficit, as a percentage of GDP, would have been only a smidgen lower in 2015 than it was in 2007.
So Allen is right that the U.S. was projected to be on a trajectory towards a balanced budget when his Senate term ended. But he omits a key detail that creates a different impression: the projected path towards a balanced budget required a step Allen refused to take -- ending the Bush tax cuts.
We rate Allen’s statement Half True.
Published: Tuesday, August 7th, 2012 at 6:00 a.m.
George Allen, Senate debate in Hot Springs, Va., July 21, 2012.
Congressional Budget Office, Historical Budget Data – January 2012 Baseline, January 2012.
CBO, "The Budget and Economic Outlook: Fiscal Years 2007 to 2016," Jan. 1, 2006.
CBO, "The Budget and Economic Outlook: Fiscal Years 2008 to 2017," Jan. 24, 2007.
CBO, "The Budget and Economic Outlook: Fiscal Years 2009 to 2019," Jan. 7, 2009.
CBO, "The Budget and Economic Outlook: Fiscal Years 2002 to 2011," Jan. 1, 2001.
Government Printing Office, Historical tablesfrom the 2006 budget, accessed July 24, 2012.
Bruce Bartlett on The Daily Beast, "The GOP’s Misplaced Rage," Aug. 12, 2009.
Washington Post, "What Went Wrong?" by Anthony Faiola, Ellen Nakashima, and Jill Drew, Oct. 15, 2008.
National Bureau of Economic Research, "Debt Overhangs: Past and Present" by Carmen M. Reinhart, Vincent R. Reinhart, Kenneth S. Rogoff, April 2012.
Review of Economic Conditions in Italy, "The Role of Banks in the Subprime Financial Crisis" by Michele U. Fratianni and Francesco Marchionne, April 10, 2009.
Mises Institute, "Manipulating the Interest Rate: a Recipe for Disaster" by Thorsten Polleit, Dec. 13, 2007.
Washington Post, "Allen, Kaine go on the attack in Senate debate," July 21, 2012.
George Allen, "George Allen Meets with Small Business Owners, Community Leaders at Mt. Vernon-Lee Chamber of Commerce Roundtable," July 18, 2012.
Brookings Papers on Economic Activity, "The Tax Smoothing Implications of the Federal Debt Paydown" by George Hall and Stefan Krieger, 2000.
The Virginian-Pilot, "Webb-Allen a tossup," Nov. 8, 2006.
Interview with Roberton Williams, senior fellow at the Urban Institute-Brookings Institution Tax Policy Center, Aug. 1, 2012.
Interview with Steve Ellis, vice president of Taxpayers for Common Sense, Aug. 1, 2012.
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