Deep Shade of Red Seen in Deficit

The federal deficit will hit a record $422 billion this year and $2.3 trillion over the next decade even if Congress does not enact any of the additional tax cuts President Bush is seeking, the Congressional Budget Office said Tuesday.

Making Bush’s previous tax cuts permanent would nearly double the 10-year shortfall to $4.5 trillion, the nonpartisan agency said. Proposals to partially privatize Social Security and scale back the alternative minimum tax, both of which have been endorsed in principle by the president, would add even more red ink.

The agency’s estimate of the deficit for this fiscal year, which ends Sept. 30, was revised down from a March prediction of $477 billion, mainly because income tax collections have been higher than expected. But the agency raised its 10-year deficit forecast from $2 trillion, primarily to reflect additional spending authorized by Congress.

Although the revisions were not huge, the new figures became instant fodder on the presidential campaign trail. Democrats used them to criticize Bush’s economic policies, while Republicans said they showed the president’s tax cuts were boosting the economy.

“Last week the Bush administration said outsourcing was good, yesterday George Bush said the economy was great, and today George Bush is celebrating a record federal deficit,” Democratic presidential nominee John F. Kerry said in a statement. “W stands for wrong, the wrong direction for America,” he said, referring to the president’s middle initial.

Vice President Dick Cheney countered that the president’s tax cuts deserved credit for reducing this year’s deficit projection because they stimulated the economy. “We’re beginning to see the resumption of economic growth in a fairly significant way,” Cheney told supporters at a campaign stop in Des Moines.

The deficit would be a record in dollar terms, exceeding the record set in 2003 when the shortfall was $375 billion. As a share of the national economy, however, it is smaller than the deficits of the mid-1980s and early 1990s. At $422 billion, the 2004 deficit is equal to 3.6% of the nation’s gross domestic product, compared with a post-World War II record of 6% set in 1983.

Although there is little evidence that the national debt ranks high on voters’ list of election-year concerns, economists said the risks of burgeoning deficits were substantial.

“If you have deficits like this, the debt just keeps rising and rising and rising relative to GDP,” or gross domestic product, said Susan Hering, senior U.S. economist in Chicago for UBS, a financial services firm. “It’s not a stable situation.”

Higher budget deficits intensify the competition between the government and private borrowers, driving up interest rates, she said. “That means you crowd out private investment.... So voters should care,” Hering said.

At this point, congressional accountants are slightly more optimistic about this year’s deficit than their counterparts in the Bush administration. In July, the White House Office of Management and Budget estimated the deficit would reach $455 billion this year.

Independent budget experts say the size of this year’s shortfall is less important than the long-term budgetary outlook. Although both presidential candidates state their intent to reduce the deficit as a percentage of the economy, neither one is offering a plan for putting the federal budget back in the black.

The CBO said it did not attempt to estimate the budgetary effect of Kerry’s campaign proposals. The Democratic nominee wants to extend most of Bush’s tax cuts for the middle class but rescind those for wealthier taxpayers. Yet several independent economists have said that any savings that would accrue would probably be offset by Kerry’s proposals to increase spending on healthcare and education.

Robert Greenstein, director of the liberal Center for Budget and Policy Priorities, said it appeared that the 10-year cost of Bush’s economic platform was slightly greater than the cost of Kerry’s campaign promises. “But under both sets of proposals, the nation would face significant problems over the next 10 years and beyond,” he said.

According to the CBO analysis, extending the Bush tax cuts that are scheduled to expire by 2011 would add $2.2 trillion to the 10-year budget deficit. Scaling back the alternative minimum tax, which is affecting an ever-bigger number of middle-class taxpayers, would cost another $425 billion under one reform scenario.

The alternative minimum tax was created to ensure that wealthy people did not escape income taxes entirely by claiming deductions, but the income level that triggers the tax was not indexed for inflation.

The CBO did not estimate the cost of partially privatizing Social Security, which Bush has endorsed in principle without offering a specific proposal.

But independent analysts estimate it would cost at least $1 trillion over 10 years to replace the payroll taxes that would be diverted to private accounts under the kind of plan the president appears to favor.

Although faster-than-expected economic expansion might trim the long-term deficit, CBO Director Douglas Holtz-Eakin said it would be next to impossible for the nation to grow its way out of deficit spending.

Even if Bush’s tax cuts were allowed to expire and nothing was done about the alternative minimum tax, the looming retirement of the baby boom generation would cause deficits to swell as Social Security and Medicare trust funds were gradually depleted, he said.

The deficit debate on the campaign trail was echoed on Capitol Hill, as lawmakers returned from their August recess to grapple with unfinished appropriations bills for the 2005 fiscal year, which begins Oct. 1.

“This is the worst budget deficit in the history of the United States,” said Sen. Kent Conrad (D-N.D.), ranking minority member of the Senate Budget Committee. “And the president is proposing to make it even worse.... We’re on a course that is utterly unsustainable, and the consequences to our nation are enormous.”

Senate Budget Committee Chairman Don Nickles (R-Okla.) said the CBO report proved just the opposite. “The president’s economic policies are working,” he said. “Economic growth is significantly strong, tax revenues are rising, and deficits this year and next are much lower than previously projected.”

Yet political analysts said concerns about the federal deficit appeared to have taken a back seat to other campaign issues, such as the conflict in Iraq, the war against terrorism, job creation and healthcare.

“There’s just no indication the deficit has any intensity in this campaign,” said Karlyn Bowman, a polling expert at the conservative American Enterprise Institute. “It’s just not on the radar screen for voters.”

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Red ink rising

With the federal budget deficit headed to a record $422 billion, it becomes a possible campaign liability for President Bush. How his stewardship of the deficit compares to other recent presidents:

Totals in billions:

*--* Total deficits Average annual Years* or surpluses deficit/surplus George W. Bush 2002-04 ($1,054) ($351) Bill Clinton 1994-01 $62 $8 George H.W. Bush 1990-93 $-1,036 $-259 Ronald Reagan 1982-89 $-1,412 $-176 Jimmy Carter 1978-81 $-253 $-63 Gerald Ford 1975-77 $-181 $-60 Richard Nixon 1970-74 $-70 $-14 Lyndon Johnson 1965-69 $-36 $-7

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*Fiscal years for which each president submitted a budget

Sources: Congressional Budget Office, White House Office of Management and Budget

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Staff writers James Gerstenzang in Des Moines and Matea Gold in Greensboro, N.C., contributed to this report.