U.S. Deficit Projected to Shrink, Then Grow

The Congressional Budget Office revised its estimates of the federal deficit Thursday, predicting that it would shrink to $260 billion in the current fiscal year -- lower than previously projected -- but rise to $286 billion in the 2007 fiscal year, which starts Oct. 1.

The new figures are stoking a partisan debate over fiscal responsibility as the midterm elections approach. Republicans cheered the prospect of a third straight year of decreases in the deficit as evidence that the economy is benefiting from GOP-sponsored tax cuts.

But the top Democrat on the House Budget Committee, Rep. John M. Spratt Jr. of South Carolina, was disdainful, contending that the continued flow of red ink was “no reason to celebrate, especially when ... the long-term outlook remains so bleak.”

Congress’ nonpartisan fiscal analyst offered a lower deficit estimate for this year -- down from the $319-billion shortfall recorded last year -- and deficits were projected through the next 10 years with existing spending and tax policy. The figures raised additional questions about President Bush’s push for Congress to make permanent a number of his first-term tax cuts, which are scheduled to expire at the end of 2010.

In February, the White House had forecast a $423-billion deficit, but it revised that figure last month to $296 billion, citing improved economic activity -- and consequent increased tax revenue -- resulting from the tax cuts.

In March, the Congressional Budget Office had predicted a $371-billion deficit. On Thursday, it attributed the new lower estimate to higher-than-anticipated tax revenue, especially from corporate profits.

Republicans said the revised Congressional Budget Office estimate showed tax cuts were working to improve the economy. “Just as we predicted, tax revenues have increased -- and as a result, the budget deficit has dropped,” said Rep. Jeb Hensarling (R-Texas), a member of the House Budget Committee.

White House spokesman Tony Snow said the president remained confident that he would achieve his goal of halving the deficit by the end of his second term, if not sooner. But Snow dismissed the forecast of a higher budget deficit next year as an “inexact science,” likening it to “asking if the weatherman’s right about next Tuesday.”

Democrats warned that the country continued to face fiscal troubles because of the debt that would accumulate as the 76 million baby boomers retire. That generation’s oldest members will qualify for Social Security in 2008 and Medicare in 2011.

The new deficit estimate “in no way means that our nation’s fiscal problems are behind us,” said Sen. Kent Conrad of North Dakota, top Democrat on the Senate Budget Committee.

The deficit is going “in the wrong direction,” he said, citing the projection that it was expected to be higher next year, and he warned that the country was on a “completely unsustainable course.”

Added Spratt, his counterpart in the House: “A $260-billion deficit is a substantial deficit, in nominal terms; the sixth largest in our history.”

Donald B. Marron, the acting Congressional Budget Office director, called the deficits, at least for the next several years, “sustainable” as measured against the economy.

“Not to say that they’re good or bad, but ... we’re in a level where things are about where they’ve been on average over the last 40 years,” he said. During that period the deficit has averaged about 2.3% of the gross domestic product.

This year’s projected deficit, measured as a share of the U.S. economy, would equal 2% of the gross domestic product, down from 2.6% in 2005. The record, 6%, was set in 1983 after President Reagan’s big tax cuts were implemented.

The Congressional Budget Office’s budget outlook, however, noted that as the population ages, spending for Social Security, Medicare and Medicaid, under current law, would “eventually exert such pressure on the budget as to make the current path of fiscal policy unsustainable.”

Budget watchdog groups seized on the new estimate to express their concerns.

Robert L. Bixby, executive director of the Concord Coalition, which supports fiscal austerity, called for greater discipline, saying that the higher-than-anticipated tax revenue has “obscured the fact that Congress is doing nothing to bring the deficit under control.” And the liberal Center on Budget and Policy Priorities, in an analysis titled “Don’t Pop the Corks,” warned that if tax cuts were made permanent and relief from the alternative minimum tax was extended, deficits would total nearly $3.5 trillion over the next decade.