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U.S. Deficit Is Smallest in Four Years

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Times Staff Writer

President Bush got some welcome news Wednesday as the federal deficit for the last fiscal year shrank to $247.7 billion, the smallest in four years, because of a nearly 12% jump in tax revenue. Bush said the numbers were more evidence that the economy was booming thanks to tax cuts that he wanted to see extended.

At two separate briefings, Bush used the news as an opportunity to reassure voters less than a month before midterm congressional elections that the economy was still in good shape, with more new jobs and investment leading to greater tax revenue.

“Tax relief fuels economic growth and ... when the economy grows, more tax revenues come to Washington. And that’s what’s happened,” Bush said at his afternoon news conference, where he was joined by Treasury Secretary Henry M. Paulson Jr.

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Bush said “pro-growth policies” that congressional Democrats had resisted had helped him deliver on a 2004 campaign promise to halve the deficit, and three years ahead of schedule.

The administration has drawn criticism for its deficit projections, and Democrats cried foul again Wednesday. They said the deficit reduction was exaggerated because Bush’s 2004 figure was a projection later reduced by $100 billion, meaning the deficit actually shrank 39% from 2004 to 2006.

“Cutting the deficit in half from an intentionally inflated high point is a misleading goal and certainly no measure of success,” said the Senate Budget Committee’s ranking Democrat, Kent Conrad of North Dakota.

Conrad added that the president also failed to note that he was tapping Social Security revenue to help cover the deficit through off-budget borrowing. Accounting for that, Conrad said, would have added $550 billion to the deficit last fiscal year, money that will have to be repaid as 78 million baby boomers become eligible for Social Security.

Other Democrats said Bush had overstated the strength of the economy and gave too much credit to tax cuts.

“Only a president with such a historically bad economic record would be this excited about a $248-billion deficit,” said Rep. Carolyn B. Maloney of New York, ranking Democrat on the Joint Economic Committee. “The large budget deficits run up by President Bush have produced record-low national saving, record-high trade deficits and record-high foreign borrowing.”

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Though Bush took credit for “restraining spending,” federal expenditures rose 7.4% compared with 2005, to a record $2.65 trillion. The biggest spending increases: education, up 28.1%; Medicare, up 12.5%; and interest on the public debt, up 15.2%. Tax revenue also reached an all-time high of $2.41 trillion.

Republicans, many of whom face newly competitive races as a result of the congressional page scandal involving former Rep. Mark Foley (R-Fla.), quickly celebrated Wednesday’s budget figures with a stream of statements about a strong economy.

Among them was House Speaker J. Dennis Hastert (R-Ill.), who has been a lightning rod for criticism in the Foley scandal.

“Coupled with an improving deficit picture, inflation remains low, unemployment is at historically low levels, family income is up, and gas prices at the pump fell by more than 70 cents per gallon in just a few months,” Hastert wrote. He promised that if elected, Republicans would “keep driving down the deficit with responsible fiscal policies.” Democrats, he said, “are promising to roll back the Bush tax cuts should they be in the majority next year.”

Clouding the sunny outlook offered by the Republicans are warnings issued in recent weeks, including from Federal Reserve Chairman Ben S. Bernanke, that the economy is slowing because of the slumping housing market and tepid job creation.

And many economists believe this year’s smaller deficit is just a blip. The nonpartisan Congressional Budget Office predicts the deficit for fiscal 2007 will swell to $286 billion and total $1.76 trillion over the next decade.

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The Congressional Budget Office also cast doubt on Bush’s assertion that tax cuts would reduce the deficit. Its estimates show that extending the cuts, which are scheduled to expire in 2010, would add $2.2 trillion to the deficit through 2016.

Treasury Department estimates show that the cuts would add 0.7% to economic growth, or $29 billion.

Conservative economists also questioned the connection between tax cuts and growth.

Rudolph G. Penner, Republican-appointed director of the Congressional Budget Office during the 1980s and a senior fellow at the Urban Institute in Washington, said tax cuts in 2001 helped prevent a deeper recession by boosting income at all levels, but could not be credited with delivering broad-based growth now. “Otherwise more of the growth would have showed up in the payrolls,” he said.

Douglas Holtz-Eakin, former director of the Congressional Budget Office under Bush, now with the Council on Foreign Relations, said: “It’s tempting to say tax cuts then, good payoff now. But ... the tax cuts’ effect is more complicated.”

He said extending the tax cuts wouldn’t produce the huge increases in corporate profit and tax revenue seen last year because he expected overall economic growth to slow to 2.6%.

“That can’t go on forever,” he said. “I fully expect for this to slow down in the years to come.”

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molly.hennessy-fiske@latimes.com

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