Fed debt forecast to climb without cuts, war

WASHINGTON -- This year's federal deficit will soar to $199 billion even without President Bush's new tax cut plan or war against Iraq, the Congressional Budget Office said Wednesday in a report that cast doubt on chances for balancing the budget anytime soon.

The nonpartisan budget office projected that without action on any tax or spending initiatives -- which no one considers realistic -- small annual surpluses would not return until 2007, a year later than the office predicted in August.

In perhaps the starkest depiction of how rapidly the government's long-range outlook has eroded, the budget office said Wednesday that it envisioned a cumulative $20 billion surplus over the decade that began last year. In May 2001, the office projected an unprecedented $5.6 trillion surplus for that same period.

The bleak forecast further inflamed this year's budget fight between Bush and congressional Democrats, who accuse each other of speeding the downward spiral of the government's books. Bush wants more tax cuts and spending restraint, while Democrats prefer higher spending and smaller tax reductions.

"The elephant in the room he didn't mention last night was the deficit," said Rep. John Spratt of South Carolina, top Democrat on the House Budget Committee, referring to the president's State of the Union address. "The question he avoided was: How would he do all the things he's talking about in the State of the Union and have any kind of bottom line left in the budget?"

In his speech, Bush renewed his call for a $674 billion, 10-year tax-cutting plan to fortify the economy, and proposed spending initiatives including a $400 billion, 10-year expansion of Medicare. He said the best way to control deficits is to foster economic growth and limit federal spending.

Beyond cash flow

Republicans echoed his argument Wednesday. They added that for now, deficits would have to play second fiddle to initiatives aimed at invigorating the economy and confronting terrorism.

"If the only index you look at is cash flow, you may be missing the point" that there are other important priorities, said House Budget Committee Chairman Jim Nussle, R-Iowa.

The budget office's projected $199 billion deficit for this year compared with a $145 billion shortfall it projected in August. Its forecast five months ago for a $111 billion deficit in 2004 also got worse, rising to $145 billion in the new report.

Since CBO's projections include none of the tax and spending initiatives that lawmakers are likely to tackle, they are meant as a benchmark for measuring future action.

As a result, actual shortfalls are almost certain to be worse. Private economists have said this year's deficit will likely exceed $300 billion -- surpassing the record $290 billion shortfall of 1992, when Bush's father was president.

Bush releases his 2004 budget Monday, and it will forecast larger deficits than CBO's because it will include the costs of the president's tax and spending plans. White House budget chief Mitchell Daniels said in an interview Tuesday that it will predict a deficit for this year of close to $300 billion -- without a war.

CBO said the surplus for the decade beginning in 2004 will exceed $1.3 trillion, without any action by Congress.

Underlining the fragility of those estimates, the budget office said the projected surpluses would all but vanish if Bush achieved just one of his top goals: making permanent the 10-year, $1.35 trillion tax cut that he pushed through Congress in 2001. Without action, those tax reductions will expire after 2010.

Other items that could further worsen the budget picture include war with Iraq, estimated to cost at least tens of billions of dollars; letting growing numbers of families avoid paying the alternative minimum tax intended for upper-income people, which could cost hundreds of billions; and the Medicare expansion both parties favor.

In addition, the solvency of the massive Social Security and Medicare programs must be buttressed for the looming retirement of the huge baby boom generation. Those costs will be many hundreds of billions of dollars.

After four decades of annual deficits, the economic and financial market booms of the late 1990s helped create four straight years of surpluses under President Clinton. But deficits returned suddenly last year under Bush with a $158 billion shortfall.

Bush and congressional Republicans have blamed the limp economy and repercussions of the Sept. 11, 2001, terrorist attacks. They say deficits of this size are manageable compared with the $10.5 trillion size of the U.S. economy.

But Democrats say the deficits were aggravated by the big 2001 tax cut. They say Bush's $674 billion economic proposal -- all but $4 billion of which involves tax cuts -- would only worsen the deficit, squeezing funds for other budget needs and risking higher interest rates.