WASHINGTON - The nation's fiscal condition is markedly worse than estimates published six months ago, analysts at the Congressional Budget Office said yesterday.
In its semi-annual review of the federal budget, the Congressional Budget Office projected that the budget deficit for the current fiscal year, which ends Sept. 30, would reach $199 billion. Late last summer, the CBO forecast that deficits for the 2003 fiscal year would total $145 billion.
Private analysts said the report significantly underestimated the deficit, in large part because the projections for the current and coming fiscal years do not factor in either President Bush's proposals for new tax cuts or the potential cost of a war with Iraq.
"The CBO normally does very good work," said Alan Sinai, chief global economist at Decision Economics, an economic information and forecasting firm. "But this is a very faulty deficit forecast and simply is not credible."
The budget office issues its forecast in January, before Congress starts work on tax and spending changes.
As a result, the estimates omit the costs of Bush's proposed $674 billion, 10-year economic stimulus package, the costs of waging war and keeping peace in the Middle East if a war with Iraq is undertaken, and billions of dollars in other spending increases that the president and Congress are likely to ap- prove.
Indeed, the White House budget director suggested on Tuesday that the deficit this year could reach $300 billion or more.
Sinai also estimates the budget deficit will be around $300 billion in the current fiscal year, nearly one-third larger than the shortfall the Congressional Budget Office is now projecting. And "there is a risk," the deficit could swell to $400 billion in 2004, Sinai said.
In its forecast, the Congressional Budget Office projects the deficit will fall to $145 billion in the coming fiscal year.
That forecast, however, is based on an economy that is projected to be growing at a 3.6 percent rate.
"Without any fiscal stimulus, growth won't be anywhere near that rate," Sinai said.
Assuming no tax or spending changes, the CBO analysts predicted that a string of annual deficits would turn back to surpluses in 2007. Last August, when they made their last projection, the CBO said the budget would be back in the black by 2006.
Private economists said the forecast was wishful thinking.
"Given the likelihood of future policy changes involving discretionary spending, prescription drug benefits and the alternative minimum tax, it appears highly likely that the federal budget will be in deficit well beyond 2007," David Greenlaw, an economist at Morgan Stanley, said in a note to clients.
The budget office did say that if lawmakers make permanent the $1.35 trillion, 10-year tax cut enacted in 2001, most of the projected budget surpluses in 2007 and beyond would vanish. Republicans have argued those tax reductions, which expire in 2011, should be made permanent.
The projected deficit this year comes on top of the $159 billion deficit recorded in the 2002 fiscal year.
Last year's deficit brought to an end the four consecutive years of budget surpluses in the final years of the Clinton administration.
"The fiscal situation has deteriorated rather markedly," said Louis Crandall, chief economist at Wrightson & Associates.
Notes and bonds
The Treasury's rising need for cash to finance bigger budget deficits will be made manifest next week, when the size and maturity of new notes and bonds to be sold at its quarterly refunding auctions will be announced.
"It looks like we will get an expanded blueprint of financing options" in the refunding announcement, Crandall said.
Specifically, Crandall said he expected the Treasury would increase the frequency with which it issues new five-year Treasury notes, to eight times a year from four times a year.
In addition, it is likely the Treasury will reintroduce sales of three-year notes. Treasury securities of that maturity have not been sold since 1998.