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Study Says Deficit Could Soar
Published on Wednesday, August 27, 2003 by the Boston Globe
Study Says Deficit Could Soar
by Stephen J. Glain

WASHINGTON -- Sharply at odds with the Bush Administration, the Congressional Budget Office yesterday forecast that if the president's tax cuts become permanent and his prescription drug plan and increased defense spending all go ahead, the federal budget deficit could total $5 trillion over the next decade.

The CBO's biannual budget and economic outlook undercuts a recent White House prediction that the budget deficit -- which can lead to higher interest rates -- would decline significantly in two years. Spiraling deficits could prove a thorny reelection issue for President Bush, who insists economic growth stimulated by tax cuts will wear away a budget shortfall that in fiscal 2000 was a budget surplus of $236 billion.

Democrats seized on the CBO report to skewer Bush, whose tax cuts they blame for inflating the deficit in the first place. "George Bush is managing this economy the way his friend Ken Lay managed Enron," Senator and presidential candidate Bob Graham, a Florida Democrat, said in a statement. "He's running it into the ground."

In its study, the nonpartisan CBO forecasts a rebounding economy next year but at the cost of lingering high unemployment and debt levels. It estimates the US economy should grow by 3.8 percent in the fiscal year ending Sept. 31, 2004, up from 2.2 percent this year. It also predicts the current 6.2 percent jobless rate will persist into 2004.

Democrats will likely couple the country's rising debt to the chaotic aftermath of the war in Iraq as a way to challenge Bush, particularly as the administration scrambles for money to pay for escalating occupation costs.

Most of the long-term expenses of rebuilding Iraq, estimated by academics and think tanks at anywhere from $100 billion to $600 billion, were not reflected in the CBO report because the Bush administration has yet to hand down a detailed financial plan for reconstruction. In a separate study, the CBO has concluded the occupation of Iraq and other military-related expenses in the war on terrorism could reach $300 billion in inflation-adjusted terms over the next 10 years, according to Joseph J. Minarik, policy director on the Democrats' side of the House budget committee.

All this will happen, economists say, just as Social Security and other commitments begin to take an unprecedented toll on the budget as members of the baby boom generation begin to retire.

"Whoever wins the 2004 election will have to take these deficits seriously," said Robert Bixby, executive director at the Concord Coalition, an Arlington, Va., institute that promotes the merits of balanced budgets. "These numbers show we've got big problems and challenges ahead even before the boomers retire."

In a briefing on the report, CBO director Douglas Holtz-Eakin said the country's debt burden was manageable relative to the size of the economy, but added that large deficits can crowd out funds available for investment and fuel higher interest rates.

The White House estimates a $455 billion deficit this year and $475 billion in 2004.

That's not very different from the CBO, which predicts the budget deficit will rise to $410 billion in the current year and a record $480 billion in 2004. Over the next decade, the deficit will grow to just under $1.4 trillion, the CBO estimates.

But those are baseline figures, Holtz-Eakin said, and do not account for the costs of new laws and policies that are likely to be implemented over the next year.

For instance, in its study, the CBO calculated the impact on the deficit of such initiatives as a prescription drug benefit, permanent tax cuts, and increases in defense spending -- all of which are likely to find their way into the budget in some form. To take one example, extending the Bush tax cuts would swell the deficit by $1.56 trillion between 2004 and 2013, the CBO estimates.

"That is not a worst-case scenario by any means," said Bixby. "The CBO is simply anticipating that spending will continue beyond the baseline and the alternatives they've laid out look very plausible."

Another way to look at the budget deficits is as a percentage of gross domestic economy. In those cases, the forecast deficits are not at record levels, according to CBO estimates. At 3.7 percent of GDP this year and 4.3 percent in 2004, the budget shortfall is well below the record 6 percent level hit in 1983.

Copyright 2003 Globe Newspaper Company


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