A tamed US deficit, but can it last?

After years of unrelenting deficits, Washington may be experiencing a break in its fiscal weather. Strong tax revenues mean that the 2007 shortfall between US income and spending will be the smallest it has been since 2002, according to new White House estimates.

But these rays of progress may be fleeting, say some experts. Revenue growth is already slowing, and defense spending and huge entitlement programs such as Medicare continue to expand at a rapid clip.

"It is always good to see the deficit coming down, but there is little about the current situation to inspire confidence that the trend will continue," says Robert Bixby, executive director of the Concord Coalition, a budget watchdog group.

First, the good news. According to the Office of Management and Budget's annual mid-session review, the federal budget deficit is now predicted to come in at $205 billion for the fiscal year that ends this October.

That's $43 billion lower than last year's deficit and about half the recent peak of $413 billion, hit in 2004. In fact, it's $15 billion lower than OMB predictions of only five months ago.

The big reason for the improved budget picture? Tax receipts. Specifically, higher-than-expected corporate tax liability, due to high profits, according to the mid-session review.

In addition, the federal government has had to pay out less than it expected in refunds of the federal telephone tax.

At a budget briefing on July 11, President Bush said the lower deficit figures showed that his economic policies were working, and that Congress should make permanent tax cuts passed at the beginning of his administration. Many of those cuts expire in 2010.

"Over the last three years, tax revenues have grown 37 percent. That's one of the highest jumps in revenue on record," said Mr. Bush.

Now, the bad news. The OMB mid-session review also predicts that the deficit will tick back up in fiscal 2008 to $258 billion.

The administration's long-term forecasts still show the budget reaching surplus in 2012. But that estimate assumes there will be no unexpected expenses for combat in Iraq or Afghanistan, note critics of the administration's budget policies.

Plus, when Bush took office, the federal budget was in the black. The plunge in red ink, due largely to his tax cuts and post-September 11 defense spending increases, occurred on his watch.

"You can't give them credit for reducing the deficit unless you also blame them for creating it," says Stan Collender, managing director at Qorvis Communications and a veteran Washington budget expert.

And just stemming the flow of red ink isn't enough, according to Mr. Collender. The US may be like a family that's run up too many charges on its credit cards. Even if it stops buying, there is still a large accumulated debt to be paid off.

Since the beginning of the Bush administration US deficits have added $2.6 trillion to the total national debt, which now stands at over $8.2 trillion.

Collender says he is very concerned about the burden of the interest on this debt. "It's the most uncontrollable part of the budget," he says.

Looking farther ahead, the nation still faces a huge budgetary crunch when members of the baby boom generation begin retiring in large numbers, sending up the costs of Social Security, Medicare, and other entitlement programs.

President Bush has threatened to veto some fiscal 2008 appropriations bills now working their way through Congress, saying, overall, lawmakers are on track to spend about $23 billion more than he requested in his budget. Yet that $23 billion is less than half the amount the US will spend next year on the Medicare prescription drug benefit alone.

"Virtually all budget analysts, including those in the administration, agree that current tax and spending policies are not sustainable in the long run," says an analysis of the mid-session review by the Center on Budget and Policy Priorities.

Economists often measure the importance of federal spending and receipts by their size relative to that of the whole economy. This gives them a feel for how well the US can bear its fiscal burdens, they say.

And as a percentage of the nation's gross domestic product, the current deficit is manageable, according to the White House. This year's estimated shortfall of $205 billion will come in at 1.5 percent of GDP, lower than the 40-year average of 2.4 percent.

Meanwhile, at an estimated 18.5 percent of GDP over the next five years, tax receipts are projected to remain above the 40-year historical average of 18.3 percent.

In this context, Bush hit Democrats as threatening US economic progress by allowing his tax cuts to expire.

"We've shown what works," said Bush at the budget event.