Budget Office Projects Deeper Deficits

Times Staff Writer

WASHINGTON -- The government's budget deficit will widen to $199 billion this year and the long-term fiscal outlook will worsen even if Congress approves no new tax cuts or spending increases, congressional analysts said Wednesday.

The annual shortfalls will be considerably larger if lawmakers adopt President Bush's tax and spending proposals, budget experts warned.

The new projections by the Congressional Budget Office set the stage for a rancorous debate over the 2004 budget Bush will submit to Congress next week. Although some of the fiscal slippage was caused by the recession, Sept. 11 and other factors over which Washington has little control, a sizable portion is attributable to the $1.4 trillion in tax cuts Bush pushed through Congress in 2001. The $670 billion in additional cuts he is seeking would add to the red ink.

"The president's agenda is reckless and threatens the long-term fiscal health of the nation," said Sen. Kent Conrad of North Dakota, ranking Democrat on the Senate Finance Committee.

Conrad said the government's deficit spending and bigger debt burden would drive up interest rates, crowd out private sector investment and slow long-term growth.

The Bush administration and its congressional allies insist otherwise. Treasury Secretary-designate John W. Snow said at his confirmation hearing this week that the president's tax cuts would stimulate economic growth without raising the national debt to dangerous levels.

The Bush administration has acknowledged that current and future deficits would be considerably higher under its new budget. This year's shortfall could rise as high as $300 billion, the White House has signaled.

Although a $300-billion deficit would be the largest ever recorded, as a share of the economy it would be a middleweight: about 3% of gross domestic product, compared with a record 6% in 1983.

The CBO analysis -- not including the proposed tax cuts -- shows the federal deficit peaking this year at $199 billion, falling to $145 billion in 2004 and gradually declining until the books balance again in 2007.

When it issued its last forecast in August, the budget office projected deficits of $145 billion this year and $111 billion in 2004. The adjustment is attributable to revised economic estimates, legislative changes and technical factors, it said.

Over the 10-year period ending in 2013, the government would record an overall surplus of $1.4 trillion if the economy performed as expected and Congress refrained from cutting taxes or boosting spending, the CBO said.

But the agency warned that its projections are likely to prove too optimistic. The budget office is required by law to issue a "baseline" budget forecast that assumes no change in current tax law and no increase in spending above the amount needed to keep up with inflation.

Lawmakers and analysts on both sides of the debate say those assumptions are clearly unrealistic.

The CBO numbers, for example, assume Congress will allow the tax cuts approved in 2001 to lapse in 2011, as specified by the original legislation. Virtually no one on Capitol Hill expects that to happen; an acceleration of the cuts is considered far more likely.

Similarly, the 10-year forecast makes no allowance for Bush's new tax-cut initiative or the additional funds he is seeking for homeland security, the war on terrorism or a prescription drug benefit for Medicare recipients.

It also contains no provision for the possibility of a war in Iraq or the cost of rebuilding that country afterward.

In addition, it disregards a growing problem that budget experts say will have to be fixed, at considerable expense: Unless current law is changed, the number of Americans required to pay the alternative minimum tax will jump from about 2 million today to 35 million by the end of the decade. The alternative tax was created to make sure wealthy people could not use tax shelters to eliminate their tax liabilities, but it has not been adjusted over the years for inflation.

William G. Gale, senior fellow at the nonpartisan Brookings Institution, said the 10-year surplus would disappear if the CBO were allowed to base its projections on more realistic scenarios.

The longer-term outlook is even gloomier, he said. Even if the government managed to balance its books again by the end of this decade, huge shortfalls are expected after the baby boomers begin to retire in 2011.

"Because Social Security and Medicare will be turning into gigantic deficits, it's all the more important to get the fiscal house in order now," Gale told reporters. "These are the good years."

According to the CBO analysis, the federal debt held by the public would be $2.6 trillion at the end of the decade under current law. Extending the 2001 tax reductions, fixing the alternative minimum tax problem and enacting the new tax cuts sought by Bush would increase the debt to $6.8 trillion, Gale said.

Some economists say chronic deficit spending and a growing national debt cause long-term interest rates to rise by creating more demand for a limited pool of savings. Others say the effect is negligible, and that Bush's economic agenda would keep deficits and the debt within manageable limits.

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