Federal Shortfall Hits Record $374 Billion for Year; Critics Blame Tax Cuts

The federal government posted a $374.2-billion deficit in the fiscal year that ended Sept. 30, more than double the previous year’s shortfall but less than anticipated, the Treasury Department reported Monday.

The 2003 deficit came in lower than the $455-billion figure projected by the Bush administration a few months ago.

Treasury officials said that tax collections turned out to be better than expected and spending was less than anticipated in the final months of the year.

“The improvement in our budget picture since our forecast last July is an encouraging sign that the economic recovery is gaining momentum,” said Joshua B. Bolten, director of the White House Office of Management and Budget, in a statement accompanying the final tally.

The deficit is still expected to top $500 billion in 2004 -- even with an improving economy; Bolten said that the shortfall will decline by half over five years if Congress hews to President Bush’s tax and spending prescriptions.

In dollars, the 2003 deficit dwarfed the previous record of $290.4 billion set in 1992, when Bush’s father was president, and the $157.8-billion shortfall recorded in 2002, when the government ended a four-year streak of budget surpluses.

As a share of the nation’s economy, however, it remained well below the records set during the Reagan administration. The 2003 deficit was equal to 3.5% of gross domestic product, compared with the peak of 6% in 1983.

The return to deficit spending reflects a combination of forces: the 2001 recession and the slow-paced recovery that followed, three successive tax cut packages pushed by Bush, and the cost of financing the war on terrorism and the military campaign in Iraq.

Administration officials said that the flow of red ink remained manageable and would begin to diminish when the recovery picked up speed and war-related spending subsided.

“As the economy grows, government revenues will go up, which will help keep the deficit under control,” said Treasury Secretary John W. Snow.

Independent analysts were less sanguine. According to Robert L. Bixby, executive director of the Concord Coalition, an Arlington, Va.-based budget watchdog group, it appears unlikely that the deficit would decline much below present levels if current economic trends continue and Congress extends expiring tax cuts and enacts a Medicare prescription drug benefit, as Bush has requested.

“The policies that are in place now and that Congress may enact shortly continue to pose a serious long-term budget challenge,” said Bixby, whose group advocates balanced budgets and fiscal restraint. “This level of deficit, about 3.5% of GDP, looks like it may be locked in for the foreseeable future.”

Analyst Isaac Shapiro of the Center on Budget and Policy Priorities, a Washington research organization that opposes cuts in social programs, said the final figures for 2003 confirmed that the Bush tax cuts had contributed to a severe fiscal squeeze that would continue for several years.

He said that $179 billion of the deficit announced Monday resulted from tax cuts. For fiscal year 2004, the tax cuts would cause $304 billion of the deficit, he said.

“The most striking fact when you really look at these numbers in historical perspective is how much revenues have dried up,” said Shapiro. “Last year, individual income-tax receipts as a share of the economy dropped to their lowest level since 1942.”

Congressional Democrats were quick to assail the president’s priorities and fiscal proposals. “The administration’s tax cuts and budget policies have not created the promised new jobs over the last three years, but they have created huge deficits that will stifle future growth and burden our grandchildren with debt,” said Rep. John M. Spratt Jr. of South Carolina, ranking Democrat on the House Budget Committee.

Tax collections and other receipts totaled $1.78 billion last year, the Treasury Department reported. Total government outlays were $2.15 billion. If Social Security and Medicare surpluses were excluded from the deficit calculation, last year’s shortfall would have been $535.1 billion.

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Times staff writer Janet Hook in Washington contributed to this report.