Budget deficit estimate drops to $296 billion under new White House figures

WASHINGTON -- President Bush is crediting his tax cuts for new deficit figures that are far lower than earlier White House estimates, but the red ink is expected to climb again next year and the longer-term outlook is more bleak. White House figures released Tuesday estimate the federal deficit for the 2006 budget year ending Sept. 30 will be $296 billion -- better than the $423 billion Bush predicted in February but only a slight improvement over last year's $318 billion.

Impressive corporate profits and big income gains by the wealthy were largely responsible for driving up tax revenues and, in turn, pushing the deficit down. On the other side of the ledger, the Iraq war and Gulf Coast hurricane relief have weighed on the deficit -- as have interest payments paid on the rising national debt.

Bush portrayed the new estimates as validation of a budget policy centered on tax cuts passed in 2001 and 2003 and his clampdown on domestic agencies funded by Congress each year.

"These tax cuts left nearly $1.1 trillion in the hands of American workers and families and small business owners. And they used this money to help fuel an economic resurgence that's now in its 18th quarter," Bush said. "Economic growth fueled by tax relief has sent our tax revenues soaring."

Democratic critics countered that Bush was celebrating figures that still represent the fourth largest deficit in U.S. history. The surge in taxes paid by corporations and upper-bracket taxpayers, they added, is proof that the current economic recovery is tilted in favor of the wealthy.

"Let's not boast about a $300 billion deficit," said Senate Minority Leader Harry Reid, D-Nev. "Any statistic you look at recognizes the rich in America are getting richer, the poor are getting poorer and the middle class is getting squeezed."

The White House and most economists say that the most relevant measure of the deficit is to weigh it against the size of the economy. In those terms, the 2006 deficit is 2.3 percent of gross domestic product, a better fiscal performance than 17 of the past 25 years. There were four years of surpluses during those 25 years.

The new projections show the deficit for next year easing back up to $339 billion, reflecting war costs and cautious revenue projections. The White House predicts it will drop to $188 billion in 2008, but that assumes a sharp slowdown in spending on the Iraq war and that Congress won't continue protecting millions of upper middle-income taxpayers from higher alternative minimum taxes.

Revenues are running $115 billion greater than expected earlier this year, the White House said, reflecting particularly strong growth in taxes paid quarterly on corporate profits and by wealthier people and small businessmen.

Income tax receipts from individuals are growing by 15 percent while corporate tax receipts are up 19 percent, the White House said.

"This trend, quite honestly, is so strong that literally if we were not at war today, and if we hadn't had to deal with the Katrina catastrophe, we would essentially be headed toward a balanced budget next year," said Senate Budget Committee Chairman Judd Gregg, R-N.H.

But Gregg and budget experts across the spectrum say the real challenge lies ahead, when the retirement of the baby boomers threatens to swamp Social Security and the Medicare health plan for the aged.

"This is good news, but let's be cautious about believing it'll go on forever," said Douglas Holtz-Eakin, former director of the Congressional Budget Office. "This doesn't change spending on Medicare, Social Security and Medicaid a dime. ... It really isn't a change in the big picture at all."

The Bush White House has gained a reputation for overstating deficit figures early in the year in order to report better news later. Indeed, if recent patterns hold, this year's deficit should improve even more by the time final figures are announced in October.

Bush has had few opportunities to boast about the deficit during his presidency. In 2001, he inherited a surplus from the Clinton administration estimated by both White House and congressional forecasters at $5.6 trillion over the subsequent decade. It quickly turned into deficits.

Those faulty estimates assumed the late-1990s revenue boom -- fueled by the stock market and dot.com booms -- would continue. That bubble burst, and a recession and the Sept. 11, 2001, terrorist attacks started a flow of red ink. Several rounds of tax cuts, including Bush's signature $1.35 trillion tax cut in 2001, also contributed to the return of deficits four years ago after four years of budget surpluses.

Some budget experts say the steep rise in tax receipts looks more impressive than it really is since revenues are bouncing back from a three-year decline during Bush's first term, drops not seen since the Great Depression.

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On the Net:

White House Office of Management and Budget: http://www.whitehouse.gov/omb

Congressional Budget Office: http://www.cbo.gov