Public Choice 118: 223–234, 2004. © 2004 Kluwer Academic Publishers. Printed in the Netherlands. 223 George W. Bush and the return to deficit finance * WILLIAM F. SHUGHART II Department of Economics, The University of Mississippi, University, MS 38677-1848, U.S.A. [I]f [the public] cannot raise its revenue in proportion to its expence, it ought, at least, to accommodate its expence to its revenue. (Smith, [1776] 1976: 946) Two noteworthy events were underway at the twenty-first century’s turn. One was the long and anxious buildup to Y2K, followed by the quiet fizzle of the overblown prophecies flogged by the media of IT Armageddon. The other was that the US federal budget was in the midst of its longest period of sus- tained surpluses since before the Second World War. It would last precisely four years. Owing to a robust economic expansion that began circa 1993, joined with a sharp reduction in defense spending overseen by a president imbued with counterculture values, the gap between current federal expenditures and cur- rent federal revenues was narrowing steadily as the twentieth century’s final decade came to a close. The deficit fell from a then-historic high of $290.4 billion in fiscal year (FY) 1992, 1 to just under $22 billion in FY 1997. A budget surplus of $69.2 billion was recorded in FY 1998, the first time red ink had not been needed in Washington since 1969. The surplus peaked at $236.4 billion in FY 2000, declined to $127.3 billion in FY 2001, and then evaporated the next year, when outlays exceeded receipts by $157.8 billion. The era of budget surpluses had come to an abrupt end. Deficits are once again being projected as far as government financial planners’ eyes can see. Initial White House forecasts for the fiscal year ending September 30, 2003, predicted a budget deficit of about $300 billion (US Office of Management and Budget, 2003b: 22); it is now expected to surpass $450 billion (“A surplus vanishes”, 2003), and to rise to $475 billion in FY 2004 (Rosenbaum, 2003). One must of course be as circumspect in interpreting US budget numbers – or those of any other government, for that matter – as investors have lately learned to be in reading the financial statements of private corporations. Being partly an artifact of the federal government’s peculiar, cash-based accounting * I benefited from the comments of Michael Reksulak and Hilary Shughart on an earlier draft. As is customary, however, I assume full responsibility for the final product.