Budget Outlook Is Heartened by Tax Windfall

A windfall of tax revenue, especially from corporations, has substantially brightened the short-term budget outlook, but beyond this year the deficit is still an unsolved problem, the Congressional Budget Office reported Monday.

For fiscal year 2005, the budget office forecast a $331-billion deficit, in line with the Bush administration’s estimate issued in July. That compares with the $364-billion deficit the budget office forecast in March and the $412 billion the Bush administration estimated in February.

Republicans interpreted the report as validating the Bush administration’s tax cuts as an engine of economic growth.

“It provides further evidence that the pro-growth policies put in place by Congress and the president are working to strengthen the economy and lower the deficit,” said Sen. Judd Gregg (R-N.H.), chairman of the Senate Budget Committee.

But Douglas Holtz-Eakin, the budget office’s director, estimated that three-quarters of the revenue increases driving down the 2005 deficit were temporary in nature and not built into the economy.

James R. Horney, a budget expert at the Center on Budget and Policy Priorities, an independent fiscal policy organization in Washington, said the improving economy could not be responsible for the extra tax revenue because the budget office report did not show the economy gaining strength compared with its March forecast.

And many independent analysts worried that the series of reports showing the 2005 deficit shrinking would make Congress less vigilant about further deficit reduction.

“The sun may be shining for now, but there are a lot of dark clouds on the horizon,” said Brookings Institution budget analyst Isabel Sawhill. “The long-term budget picture is bad and getting worse.”

Sen. Kent Conrad of North Dakota, the ranking Democrat on the Senate Budget Committee, pointed out that the budget office predicted $157 billion in new revenue in the 2006-2010 period, far less than the administration’s projection of $406 billion.

“It would be a mistake to rely on this revenue increase carrying forward,” he said in a statement.

Rep. John M. Spratt Jr. of South Carolina, ranking Democrat on the House Budget Committee, said the $331-billion fiscal 2005 deficit -- which would be the third-largest ever -- was nothing for the administration to crow about. He noted that the 2005 budget had swung $764 billion in the wrong direction since Bush took office in 2001. At that time, the budget office foresaw a surplus of $433 billion for 2005.

The budget office’s projections are required to be based on current laws, even though they may not endure for the full 10 years covered by the budget estimates. Thus its most recent projections, in March, included little spending for the war in Iraq because Congress had not yet enacted its war appropriations bill.

Congress has since voted $95 billion in supplemental appropriations for 2005, not only for Iraq and Afghanistan but also for tsunami relief and veterans’ healthcare. The budget office, therefore, has assumed that these expenditures would be repeated in each of the subsequent nine years, despite the unlikelihood that, for example, tsunami relief would continue to cost billions of dollars a year.

Likewise, the budget office assumed that the Bush tax cuts enacted in 2001 and 2003 would expire in 2011, even though the president has said he would work to make them permanent.

Using this approach, the budget office found that the deficit, after shrinking by $33 billion in 2005 compared with its earlier estimate, would grow in each of the next 10 years by a combined total of $1.13 trillion.

The deficit would remain above $300 billon a year through 2010 and then, driven down by the expiration of the tax cuts, fall to between $50 billion and $100 billion from 2012 to 2016.

The budget office also projected the effect of more “realistic” policy assumptions, including phasing down U.S. operations in Iraq and extending the expiring tax cuts. The budget office did not do the arithmetic to show the deficits that might result, but the Center for Budget and Policy Priorities did.

The center found that annual deficits would not dip below $330 billion through 2015 and that, altogether, $4 trillion would be added to the national debt over the next 10 years.

Richard Kogan, a senior fellow at the center, said the national debt, 30% of annual economic output when Bush took office, would grow to 44% by 2015 under these policies.

The budget office found that government revenue, which hit a 43-year low of 16.3% of national economic output in 2004, was bouncing back to 17.5% in 2005 and an average of 18.5% over the next 10 years. Government spending, it said, would reach 20.2% this year and average 19.8% over the following 10 years.