Deficit forecast collides with Bush's plans

Projections of $477 billion budget gap sharpen debate over extending tax cuts.

The nation's fiscal outlook has now come full circle in three years: from sunny surplus to deficit overcast as far as economists can see.

Things have become so bad that some analysts believe President Bush may be starting to scale back aspects of his domestic spending agenda. For instance, Bush's State of the Union speech included no mention of his proposal to send men to Mars, an expensive proposition that had received a cool reception in Congress.

But Bush has only redoubled calls to make his tax cuts permanent, and there's increasing evidence that such a move might make it extremely difficult to fulfill another of his pledges - halving the deficit by 2009.

"Extending the tax cuts is the largest single policy change they're talking about - that alone would expand the deficit by $2.2 trillion over 10 years," says Robert Bixby, executive director of the Concord Coalition, a fiscal watchdog group in Washington.

A new forecast issued by the Congressional Budget Office (CBO) on Monday emphasized the scale of the deficit problems ahead.

This year's deficit will be a record in dollar terms, at $477 billion, according to CBO. That's equal to about 4.5 percent of the nation's gross domestic product.

Economists consider the size of the deficit as percentage of GDP to be an important measure of what the nation can afford. By this standard the record US deficit was that of 1983, at around 6 percent of GDP. Without any changes in spending or tax policy, the deficit might gradually fade away, according to CBO's new numbers. By 2014, the budget might actually return to surplus.

But Washington abhors legislative stasis, and it's virtually certain that the White House will propose and Congress will pass major bills in coming years. Making permanent all of the Bush tax cuts now set to expire would result in deficits of around $300 billon a year for the foreseeable future, absent spending cuts.

Curbing a scheduled increase in the alternative minimum tax would add around $25 billion a year to the deficit. Expansion of the just-passed Medicare prescription drug benefit might add billions more - as might a manned mission to Mars.

Since the CBO last issued budget projections in August, its 10-year accumulated deficit estimate has increased by $1 trillion - mostly due to spending changes. "About 70 percent of that [increase] results from new legislation, such as the Medicare law," says CBO's report.

The Bush administration explains the huge deficits as primarily the result of the recent recession. Furthermore, they see the tax cuts as providing needed stimulus to a slow recovery and encouraging business investment that will produce new jobs. Many economists agree that the first installments of the tax cuts did provide a short-term boost. But they warn that extended deficits are risky and could do long-term damage to the US GDP.

"We think large, sustained deficits matter very much," said Alice Rivlin, a senior fellow at the Brookings Institution, at a recent seminar marking the release of a study on deficit issues.

That's because the government has to borrow to pay the deficits, and that means they compete with private borrowers, putting upward pressure on interest rates. Deficits in the range of 3.5 percent of GDP will eventually raise long-term interest rates by one or two percentage points, said Ms. Rivlin. "That translates into lower capital expenditures, lower productivity growth, lower GDP," she said. "We estimate that it means about $1,800 less income per household in 2014."

There's also a chance - although a relatively small one - that sustained deficits might cause other nations to lose confidence in US economic stewardship, and foreign investors to begin pulling money out of the US. That could cause US interest rates to spike even higher.

Administration officials retort that such talk is alarmist. The president has said he will halve the deficit within five years, "and that's what we intend to do," White House spokesman Scott McClellan said Monday.

The administration's $2.3 trillion budget proposal is due in Congress on Monday. It will hold nondefense, nonsecurity spending to a 0.5 percent increase, according to the White House.

But spending is not the part of the budget that is out of line with historical trends, according to some analysts.

CBO's new figures predict that US government revenues will fall to 15.8 percent of the economy in 2004, the lowest since 1950, according to an analysis by the Center on Budget and Policy Priorities.

Income tax revenues will be 8 percent of the economy, the lowest since 1942, according to the generally liberal-leaning group. "Spending has grown in recent years, particularly in the areas of defense, international affairs, and homeland security," notes an analysis by the group. "Spending has not attained especially high levels in historical terms, however, and the spending increases that have occurred have been considerably smaller than the revenue declines."

• David R. Francis contributed to this report.