U.S. Budget Outlook Worsens Sharply

Federal budget deficits are expected to total $2.4 trillion over the coming decade, the Congressional Budget Office said Monday, almost $1 trillion more than the agency estimated only six months ago.

If Congress heeds President Bush’s call and makes the tax cuts of the last three years permanent, that total could jump to more than $5 trillion, according to CBO figures, a development that would make it extremely difficult for Bush to keep his pledge to cut the deficit in half by the end of a second term.

About two-thirds of the extra $1 trillion in red ink would be the result of recently passed legislation, especially the new Medicare prescription drug measure. Most of the rest would be due to changes in the CBO’s economic outlook, including a reduction in its inflation estimate that would cause future government revenues to shrink.

The congressional agency’s new deficit estimate, an annual event, comes as Bush prepares to unveil his election-year budget and seems certain to add fuel to a heated presidential campaign debate.

Among the figures Bush critics are likely to zero in on: Federal revenues as a fraction of the country’s gross domestic product have fallen to levels not seen since President Truman’s days.

Economists believe that comparing budget items and budget deficits to the GDP is the best way to gauge their size because it puts costs against an indication of the nation’s ability to pay. Critics say the decline in revenues as a fraction of the GDP shows that the president’s tax cuts are starving the government of funds.

Democrats are already using the deficit to contrast Bush’s economic and budget record with that of President Clinton, who managed a string of budget surpluses during his final years in office, the first in nearly three decades. But deficits are not simply a party-versus-party issue; they create fissures in both parties between “hawks” who fear that federal overspending could cause substantial economic damage and those who think the problem is overblown.

“The nation’s fiscal outlook is deteriorating,” said Robert L. Bixby, executive director of the Concord Coalition, a bipartisan budget watchdog organization in Arlington, Va.

“The politically unappealing reality staring at those on Capitol Hill is that it will take a significant slowing of spending growth or new revenues or, most likely, both to return the budget to balance,” added Maya MacGuineas, executive director of the Committee for a Responsible Federal Budget, a similar group.

The CBO, Congress’ nonpartisan fiscal analyst, predicted that the deficit for the 2004 fiscal year, which runs through Sept. 30, would hit $477 billion -- a record in dollar terms and substantially higher than last year’s $375-billion shortfall. But at 4.2% of the GDP, it is still below the gargantuan deficits of the 1980s. The new projection was similar to the CBO’s estimate in August.

After this year, the agency predicted, deficits will begin shrinking -- to $362 billion in fiscal 2005, $269 billion in 2006 and so forth -- until the end of the decade, then drop precipitously and actually show a nearly $13-billion surplus by 2014.

But agency officials readily acknowledged that their projections were based on a number of heroic assumptions, chief among them that Congress and the president add not a single spending program or approve any more tax cuts. “It’s really the policy decisions Congress and the president make that will determine where we end up,” said the CBO’s director, Douglas Holtz-Eakin.

Senior administration officials and GOP congressional leaders renewed their pledge Monday to bring federal revenues and expenditures into line. Treasury Secretary John W. Snow told a London conference via satellite that the administration still intends to cut the deficit in half over the next five years. “Make no mistake; President Bush is serious about the deficit,” Snow said.

House Budget Committee Chairman Jim Nussle (R-Iowa) said that although the economy’s recent revival should boost federal tax revenue, growth alone wouldn’t solve the problem. “Deficits do matter,” he said.

But such assertions were greeted with substantial skepticism across the political spectrum. Sen. Kent Conrad of North Dakota, the ranking Democrat on the Senate Budget Committee, attacked the president for simultaneously embracing deficit reduction and making expensive new proposals. “The president wants to go to Mars, and he’s got deficits going to the moon,” Conrad said in a statement.

William Beach, a senior analyst with the conservative Heritage Foundation, faulted Republicans for failing to couple tax cuts with similar-sized spending cuts. “The Republicans have simply not kept their part of the bargain on spending,” he said.

On their face, the new CBO estimates suggest that Bush should have little trouble making good on his promise to slice the deficit in half over five years. According to the agency, the deficit is already in line to fall from $477 billion this year to $268 billion in 2009 -- the last year for which Bush would write a budget, presuming he is reelected. By one measure, that would more than halve the deficit, by shrinking it from 4.2% of the GDP to 1.8%.

The problem is that the CBO is required by law to make a number of assumptions that appear politically unrealistic, especially during an election year. The first, and most important, is that the president and the Republican-controlled Congress will let their hard-won tax cuts expire over the coming decade and allow taxes to go back up. The second is that they will increase spending at no more than the rate of inflation, or about 2.2%, rather than the 6.9% annual pace at which they have been boosting it in recent years.

If, instead, Bush and the Republican Congress make the tax cuts permanent and continue to increase spending at the 6.9% rate, one senior GOP congressional staffer estimated that the 2009 deficit would be $695 billion, instead of $268 billion. As a fraction of the economy, he said, its size would have increased to 4.8%, rather than have fallen.

Independent analysts said that to get a more realistic picture of deficits during the coming decade, two changes should be made in the CBO estimates. In addition to adding in the costs of making the tax cuts permanent, they said, it is necessary to subtract some costs of the war in Iraq. The CBO is required to make its estimates as if current federal spending priorities will remain unchanged, so the agency effectively treats the war as if it will go on indefinitely.

When those two changes are made, a very different picture emerges. Instead of deficits peaking this year, and then beginning an inexorable downward march as the CBO figures suggest, deficits remain stubbornly above $300 billion -- and some of the time above $400 billion -- for the entire decade.

This second change involving the war costs would tend to reduce the deficit.

Also, by 2013 or 2014, the nation will begin confronting the added burden of underwriting the retirement of the baby boom generation, a task that the administration’s own budget documents of last year show could push deficits to 25% or more of the GDP.

Election-year debate over deficits is all but certain to pit spending-cut advocates against those who are pressing to raise taxes or, at the least, allow current tax cuts to lapse. The new CBO estimates offer ammunition to both sides.

The estimates show that, even with no new programs, federal spending will climb by more than $1 trillion between this year and 2013, and remain at what spending-cut advocates say is an exorbitant 20% of the GDP.

But the estimates also show that federal revenues as a percentage of the GDP have fallen from more than 19% to 15.8%, their lowest level since 1950, according to the liberal Center on Budget and Policy Priorities. Income tax revenues -- which make up about half the federal revenues, with payroll and other taxes accounting for the rest -- have fallen to 8%, their lowest level since 1942, Center analysts said.

Critics argue that these figures show it is tax cuts -- not overspending -- that are at the root of the deficit problem.

The new CBO estimates are only the latest reminder of the nation’s fiscal about-face. In 2000, as the country was electing a new president and the long growth wave of the 1990s was cresting and curling under, the federal government was running a surplus that amounted to 2.4% of the GDP, and the big worry among policymakers was how to manage when Washington no longer needed to borrow.