Large federal deficits forecast

Shortfalls through 2005 mainly economy's fault, budget office chief says

Numbers `not historically huge'

August 28, 2002|By NEW YORK TIMES NEWS SERVICE

WASHINGTON - The Congressional Budget Office predicted yesterday that the federal government will run big budget deficits through 2005, and those estimates do not include the impact of President Bush's proposals for higher military spending and his ideas for additional tax cuts.

The forecast is considerably more pessimistic than what the Bush administration has predicted, and it virtually wipes out the trillion-dollar surpluses that the White House and Congress had foreseen during the next decade.

The new estimates point to a sharp reversal in the government's fiscal position, which shifted from a sizable overall surplus last year to a bigger overall deficit this year.

The bipartisan Congressional Budget Office estimated that tax revenues this year are about $131 billion, or 6.6 percent, lower than last year, the biggest one-year drop in nearly half a century.

The new forecasts were immediately seized as fodder by Democrats and Republicans in their battle over extending the tax cuts that Bush pushed through Congress last year.

Democrats charged that Bush's tax cuts were the main culprit behind the abrupt lurch into the red, and they used yesterday's report to attack the president's plan to make his tax cuts permanent.

"The president is taking us down the path of soaring budget deficits, and he wants to dig the hole even deeper," said Democratic Sen. Kent Conrad of North Dakota, the chairman of the Senate Budget Committee.

White House officials and congressional Republicans argued that the new deficits instead reflect the recent economic slowdown, the price of the war in Afghanistan and the costs of beefing up internal security against terrorism.

Daniel Crippen, director of the nonpartisan Congressional Budget Office, said the recession and plunging stock markets appeared to have played a bigger role than tax cuts in reducing tax revenues.

But Crippen also said that the magnitude of the drop remains a mystery. Tax revenues have declined faster than the economy, and nobody knows why.

Much of the decline might stem from huge stock-market losses, but it also might reflect deeper changes in tax-paying behavior that endure beyond the bear market.

By law, the Congressional Budget Office cannot base its estimates on proposals by the White House or Congress. It assumes that tax laws remain unchanged and spending continues on the same trend over the next 10 years.

Inevitably, the forecasts diverge with reality as the laws and the nation's economy evolve.

But perhaps the most striking trend in the latest forecast is the long string of deficits that would occur under almost any scenario.

If one excludes the "off-budget" surpluses accumulating in the Social Security trust funds, which are supposed to be reserved for the baby-boom generation's retirement, the new forecast estimates that the deficit will stretch to 2010 and be followed by small surpluses during the next two years.

But even those modest surpluses assume that Bush's tax cuts of last year expire in 2010, as they are scheduled to. Bush is pushing hard for Congress to make the tax cuts permanent.

If the president is successful, tax revenues would decline by an additional $350 billion in 2011 and 2012, and the modest budget surpluses of those years would evaporate.

The other element not included in yesterday's forecast are Bush's ideas for incremental tax cuts next year as well as large additional spending increases for the military and homeland security.

Republican analysts on the Senate Budget Committee said the combined impact of those changes would increase next year's budget deficit to $180 billion.

All of that adds up to considerably higher deficits during the next several years than the White House Office of Management and Budget predicted in its forecast in July.

At that time, the Bush administration said the total deficit would shrink to $71 billion next year and disappear in 2004.

In a historical perspective, the bickering about deficits over the next year or two is probably less important than the longer-term outlook.

Even the pessimistic scenarios envision a federal deficit that would be less than two percent of U.S. gross domestic product and would decline during the next few years.

"Relative to the size of the economy, these numbers are not historically huge," Crippen said.

What does alarm people like Crippen is the crunch that will come when an aging population begins to rely heavily on Social Security, Medicaid and Medicare.

Ten years from now, the cost of those three programs alone will add up to more than $1.5 trillion a year, almost as much as the total amount of this year's tax revenues.

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