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Deficit, although still big, won't be as bad as predicted

WASHINGTON - Congressional forecasters said Monday that the federal deficit this year, though still huge, won't be as bad as projected - a welcome turn for President Bush, who inherited healthy surpluses four years ago and saw them disappear in a sea of red ink.

At the same time, the fiscal outlook remains troubled for years to come, the nonpartisan Congressional Budget Office said.

The CBO predicted a $331-billion deficit for the budget year ending Sept. 30 and a $314-billion deficit for next year.

Last year's deficit was a record $412-billion. In February, the White House had predicted this year's shortfall would set a record of $427-billion.

The short-term improvement was attributed to an $84-billion surge in estimated tax receipts, including a 42 percent increase in revenues from corporate profits.

Unlike a competing White House estimate issued last month, the CBO warned that the revenue improvements probably will not be sustained.

"Although the deficit for 2005 is lower than previously expected, the fiscal outlook for the coming decade remains about the same," the CBO report said.

Still, the White House cheered the news. Until this summer, virtually every budget analysis issued by the CBO or the White House during the past four years contained bad news for the president, who in 2001 inherited inflated estimates predicting $5.6-trillion in surpluses over 10 years. He promptly muscled through Congress a $1.35-trillion tax cut.

But the economy hit a recession, the stock market tumbled, and a surge in homeland security spending after the Sept. 11, 2001, attacks combined with the tax cuts to produce a return to deficits. Finally, the deficit news is getting a little better.

"This report confirms the dramatic improvement in the 2005 deficit picture that the administration reported last month," said Scott Milburn, a spokesman for the White House budget office. "The president is committed to the combination of strong economic growth and spending restraint that will keep us on track to cut the deficit in half by 2009."

But the CBO report calls that promise - to halve a $521-billion deficit projected for last year to $260-billion - into question since it projects a $321-billion deficit for 2009. That figure may be inflated because it assumes the war in Iraq will continue to require cash infusions such as the $82-billion passed by Congress in May.

Still, even with a phaseout in Iraq and Afghanistan, the deficit would exceed $300-billion the way the CBO estimates the cost of Bush's budget.

The White House foresees a $333-billion deficit for the year that's about to end and a $341-billion deficit for next year.

Democrats on Capitol Hill were quick to warn about the long-term deficit.

"While this year's deficit will be lower than last year's record shortfall, the improvement is likely to be short-lived. Declarations of victory over budget deficits only distract from the disturbing long-term budget outlook," said Kent Conrad of North Dakota, top Democrat on the Senate Budget Committee.

Last year's deficit was a record in dollar terms, though many deficits in the mid 1980s and early 1990s were larger when measured against the size of the economy. The White House and most economists say the more relevant measure of the deficit is to weigh it against the size of the economy. Measured that way, the latest estimates for this year are slightly worse than recent historic averages.

Unlike White House estimates released last month, the CBO assumes Bush's tax cuts are allowed to lapse at the end of the decade. Most of the cuts in Bush's signature $1.35-trillion tax cut law enacted in 2001 expire by 2010, but many lawmakers and the White House assume they will be renewed by then.

Even if taxes return to Clinton-era levels, the budget would still stay in the red through the full 10 years covered by the CBO's report.

If Bush's tax cuts are renewed, the deficit picture would worsen by $204-billion in 2011 - to perhaps $327-billion. By 2015, the cost of extending the 2001 and subsequent tax cuts would reach $432-billion.

[Last modified August 16, 2005, 01:30:10]