Congress Faces the Return of Budget Deficit

Under pressure to avert a severe recession after last month’s terrorist attacks, Congress is about to make decisions that could shape the nation’s budget and economy long after the bombs stop dropping on Kabul.

The tax cuts and spending increases being considered in Congress will almost certainly plunge the government back into deficit spending for the first time in five years.

More important, congressional action in the coming days and weeks--on the economic stimulus package, as well as more routine appropriations bills and political priorities such as the farm bill--will determine whether the once-gigantic budget surplus vanishes for a year, or for the foreseeable future.

Just about everyone seems to agree that the government should run a deficit this year to meet the emergency demands of war and recession, but fiscal conservatives increasingly worry that this temporary departure from discipline will open the floodgates to permanent spending increases and tax cuts.

They fear fiscal discipline will collapse and deficits will roar back just as the government should be shoring up Social Security and Medicare funds for the baby boom generation’s retirement.

Coalition Warns on Tax Cuts, Spending

To avoid that, the Concord Coalition, a nonpartisan budget analysis group, recently took out a full-page ad in the New York Times calling on Congress and President Bush not to overdo the tax cuts and spending.

The chairmen and ranking members of the House and Senate budget committees have issued an unusual joint statement calling on their colleagues to make any economic stimulus measures effective for only one year.

But with proposals from both parties for permanent tax cuts and spending commitments alive in the halls of Congress, such calls for fiscal discipline may amount to whistling in the wind.

It’s enough to make some fiscal conservatives long for the years of gridlock that stalled many of the big spending and tax cut initiatives of the Clinton years.

“The psychological question is, can you reimpose fiscal discipline on the political system once it’s been broken?” said Robert Bixby, head of the Concord Coalition. “Or do we have to run big deficits until everyone sobers up and gets serious about fiscal discipline again?”

That question was almost unthinkable at the beginning of this year, when the budget was on track to swim in surpluses for years to come. But that vast pool of projected revenue evaporated like a mirage as the year progressed.

Last spring, the Congressional Budget Office said the surplus for the 2002 fiscal year, which began Oct. 1, would be $313 billion.

Then Congress passed Bush’s $1.35-trillion tax cut, and the economy steadily slowed.

By August, the CBO was projecting a 2002 surplus of $176 billion.

Fiscal Caution Thrown to Wind

Even more of the surplus was lost after the Sept. 11 terrorist attacks.

Congress went on a war footing, throwing fiscal caution to the wind. It immediately voted $40 billion to respond to the attack.

Then it approved $15 billion to bail out the battered airline industry.

Even on issues unrelated to the attack, all bets were off. Congressional and White House negotiators reached a 2002 budget agreement that would allow appropriations to grow by 7% from 2001 to 2002--far more than the 4% growth limit Bush had long insisted on.

All that action has whittled the 2002 budget surplus to $52 billion, according to new estimates issued by the House and Senate budget committee staffs last week.

Now even that remaining surplus is about to vanish, if Congress and the White House follow through on plans to pass an economic stimulus package in the range of $60 billion to $70 billion.

The deficit will get even bigger if Congress goes ahead with a $7-billion expansion of farm programs, a $16-billion railroad retirement program and $2 billion in energy tax credits--all of which have been approved by the House in recent months.

Analysts say the budget may run in deficit for just a year or two. That hinges largely on a factor mostly out of Congress’ control: how long the recession lasts.

But Congress has its hands on some of the budget levers, and one of them is the composition of the coming economic stimulus package.

Many economists argue that the package should involve only short-term measures, to maximize its immediate economic effect and minimize its long-term drain on the surplus.

The economists fear that a future lined with deficits--or even with much smaller surpluses than expected--will drive up long-term interest rates and discourage investment.

Bixby and other fiscal conservatives recommend, for example, another onetime tax rebate in 2002 and a temporary tax cut to speed up the write-offs for businesses that invest in new equipment.

Bush endorsed those elements last week, although he did not say whether the business write-offs should be temporary or permanent.

Some Cuts Sought as Long-Term Policy

Many other ideas being considered as fiscal stimulus would not be temporary.

Many Republicans want a permanent cut in capital gains taxes, arguing that it would not be an effective incentive to invest if it were not long-term policy.

The president has proposed speeding up the scheduled income-tax rate reductions that were approved earlier this year.

Bush has also proposed backing repeal of a corporate levy known as the alternative minimum tax, which is intended to ensure that all companies pay some tax.

What’s more, many of the spending increases that have been approved or contemplated as part of Congress’ anti-recession effort--including defense and anti-terrorism hikes or Democratic proposals to increase spending for highways and other infrastructure--are likely to be permanent increases in the size of agencies’ budgets, not one-shot infusions of cash.

Robert D. Reischauer, a budget expert who heads the Urban Institute, argued that the best approach would be to limit the package to short-term, temporary measures.

But Reischauer said the political reality was such that “that would be more than we can hope for.

“We will probably see a combination of temporary measures and old-fashioned pork,” Reischauer said.