Bush's agenda faces rising budget deficit

The outlook for the federal deficit isn't getting any better - and that grim reality could affect prospects for passage of much of President Bush's domestic agenda.

Congressional Budget Office projections released Tuesday estimate Washington will run $368 billion in the red for fiscal 2005. That's $20 billion worse than the CBO's projection from last fall.

Meanwhile, military operations in Iraq and Afghanistan are costing millions per day. Medicare and Medicaid expenses are mounting quickly. In that context, even some Republican lawmakers might balk at borrowing billions to fund establishment of private accounts within Social Security, as the White House wants.

"Let me make a broad point: There is still a substantial imbalance between taxes and spending. It is that simple," says Gus Faucher, senior economist at Economy.com.

It isn't as if Washington is surprised that red ink is flowing through national accounts like water down the Potomac. The administration has already vowed to cut deficits in half by 2009. That's difficult but not impossible - if the economy continues to strengthen in coming years.

The just-released CBO numbers hold that the 2005 deficit will be substantially lower than 2004's record $412 billion. That's the good news, according to House Budget Chairman Rep. Jim Nussle (R) of Iowa.

But the bad news is that the numbers also show that mandatory spending - largely composed of the government's giant benefit programs, such as Medicare - continue to grow as a share of Uncle Sam's total spending.

Such outlays are projected to grow from 54 percent of the budget in 2004 to 62 percent in 2015, absent changes in law, according to CBO.

"The [CBO] report makes it abundantly clear that we must get mandatory spending under control," said Representative Nussle in a statement.

Overall, the deficit picture has slightly worsened since the fall, according to the report by CBO. Though it is difficult to compare numbers exactly, due to the swings of supplemental spending for military operations in the Middle East, CBO says that the total budget deficit projection for 2005-20014 has worsened by about $500 billion.

"New legislation accounts for about three-quarters of that increase, most of it from recent laws that extend certain tax provisions and provide funding for disaster relief," concludes the CBO study.

Meanwhile, the tab continues to run for Iraq. The White House was expected to ask Congress Tuesday to approve $80 billion more in supplemental funds for military operations around the world.

This newest request would push the total price tag for the war on terrorism and the operations in Iraq and Afghanistan past $300 billion.

By way of contrast, the Vietnam War cost $623 billion, in 2005 dollars.

Against this context, the Bush administration was readying its 2006 budget for release on Feb. 7. Given the circumstances, the budget is expected to be tight.

Bush has promised to cut the deficit in half by 2009 from an early 2004 forecast of $521 billion.

"The president has a plan to cut the deficit in half over the next five years, and we're on track to meet that goal," said White House spokesman Scott McClellan.

Democrats disagreed, pointing out that CBO's projection of a $368 billion deficit for this year does not include the costs of the military supplemental, for instance.

"Having racked up three of the largest deficits in history, the Bush administration is years away from reducing the deficit by half, or by any appreciable amount," said Rep. John Spratt (D) of South Carolina.

If nothing else, the new deficit projections were a reminder that the debate over Social Security will involve questions of affordability, as well as argument over the nature of partial privatization.

Transition costs for the addition of private accounts within the system could run in the trillions of dollars. Proponents note that the change could lessen pressure on the system in the long run, by lowering the government's obligation to younger workers that choose the accounts. The cost of changing the system, in the long term, would thus be negligible, say some.

But there are many famous sayings involving the words "long run" and "economist," and critics note that government borrowing for this transition would likely be treated by financial markets as an increase in the deficit. This could cause interest rates to go up and the dollar to slide further against other currencies.