Deficit Will Hit $165 Billion, White House Says

The White House said Friday that this year’s federal budget will run a deficit of about $165 billion, the first time since 1997 that Washington has spent more money than it has taken in.

The return to red ink was not a surprise, but the deficit’s size is larger than anticipated. Bush administration officials also warned that a balanced budget may not reappear until 2005, at the earliest.

“This is a fragile recovery still,” said White House Budget Director Mitchell E. Daniels Jr. He also suggested that tough spending restraints are in order: “When we are trying very hard to get back to balance, every dollar counts.”

Daniels’ deficit projections ignited a new round of partisan finger-pointing, capping a week of wrangling between Republicans and Democrats on an array of issues.

The White House blamed the deficit on a weak economy that it says it inherited from the Clinton administration, as well as on the war against terrorism and the “whipsaw” effect of a soaring stock market that has plummeted.

Democrats blamed President Bush’s 10-year, $1.35-trillion tax cut Congress enacted last year and what they called Bush’s insufficient response to the corporate scandals now sapping investor confidence.

They also accused the White House of presenting too rosy a picture in order to shield the president from further political fallout.

The deficit projections and the political debate set the stage for Bush’s scheduled speech in Birmingham, Ala., on Monday on the economy. The president will be “sharing with the public some of his thoughts about the strength of the economy and some of the underlying factors and fundamental strengths that are found in the economy,” said White House Press Secretary Ari Fleischer.

The Congressional Budget Office earlier had projected a deficit of about $100 billion.

If the latest projection proves accurate for the fiscal year that ends Sept. 30, the government would record its largest shortfall since 1994. In 1998, the government recorded its first surplus ($69.2 billion) since 1969.

For fiscal year 2001, the $127-billion surplus was no surprise. The largest deficit on record was $290.4 billion, in 1992.

Even before Daniels officially released the numbers Friday afternoon, White House officials set out to put their own spin on the news.

Fleischer said at his daily briefing that the economic downturn would have been worse had it not been for Bush’s across-the-board tax cut. That measure, he argued, promoted growth.

“Last fall ... the economy was in recession. The first quarter of this year, the economy grew by more than 6 percentage points, in good part spurred by the tax cut,” he said. “It was a perfectly timed tax cut.”

“The factors that have contributed [to the deficit] are the fact that we went into a recession as a nation in March of 2001,” Fleischer added, “as well as the fact that we were a nation that went to war in September of 2001, which led to a large amount of increase in federal spending for homeland security and for the defensive needs of our nation--properly so.”

A final contributing factor, he said, is the drop in capital gains revenues as a result of the plummeting stock market.

On Capitol Hill, Democrats charged that the White House’s new projections attempt to paper over a steadily worsening fiscal situation.

“They have now wandered off to fantasy land and are seriously understating the deficits and buildup in debt that we’re facing,” said Sen. Kent Conrad (D-N.D.), chairman of the Senate Budget Committee.

“The markets are voting every day on the credibility of this economic team,” Conrad said, “and they’re giving a thumbs down.”

Rep. John M. Spratt Jr. of South Carolina, the top Democrat on the House Budget Committee, attacked the assumption by the White House that the federal budget may return to surplus by fiscal 2005.

“We’re skeptical, to say the least, about the numbers they’ve released.”

Daniels told reporters that the 2005 target date for a possible return to a balanced budget is based on “three big ifs”: the economy, the war on terrorism and spending. Those projections also are based on the assumption of a “modest” growth in revenues of between 5% and 6% annually, compared with 7.5% in the last decade, he said.

In several speeches in recent months, Bush has assiduously sought to inoculate himself against political fallout for presiding over the nation’s return to an era of red ink.

Time and again, he recalled an interview that he said he gave to a reporter in Chicago during the 2000 presidential campaign.

According to Bush, he told the reporter that he would not deficit spend unless the nation found itself at war, in a national emergency and in a recession.

His punch line: “Never did I dream that we’d have a trifecta!”

On another budget issue, Pentagon Comptroller Dov Zackheim called a news conference to warn members of Congress that the Defense Department would be unable to pay personnel and would begin shutting down programs if lawmakers leave for their August recess without approving emergency spending for military operations.

While acknowledging that the Pentagon has often engaged in fiscal “hand-wringing,” he said this time the cash crunch is acute.

“I’m not crying wolf here. This is what’s going to happen,” Zackheim said. “This is not a good signal to send to some of the bad guys out there.... The fact is that wars cost money.”

Bush asked Congress this year to approve about $27 billion in supplemental funding for the military and other anti-terrorism expenses.

A $29-billion version of the bill has passed the House; a $31.5-billion bill has passed the Senate.

Lawmakers are trying to produce a compromise. Bush budget officials have threatened to veto a compromise bill if it goes beyond what the House approved.

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Times staff writers Nick Anderson and John Hendren contributed to this report.