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Deep Shade of Red Seen in Deficit

The shortfall will reach a record $422 billion this year and $2.3 trillion in the next decade even without further tax cuts sought by Bush.

September 08, 2004|Warren Vieth | Times Staff Writer

WASHINGTON — The federal deficit will hit a record $422 billion this year and $2.3 trillion over the next decade even if Congress does not enact any of the additional tax cuts President Bush is seeking, the Congressional Budget Office said Tuesday.

Making Bush's previous tax cuts permanent would nearly double the 10-year shortfall to $4.5 trillion, the nonpartisan agency said. Proposals to partially privatize Social Security and scale back the alternative minimum tax, both of which have been endorsed in principle by the president, would add even more red ink.

The agency's estimate of the deficit for this fiscal year, which ends Sept. 30, was revised down from a March prediction of $477 billion, mainly because income tax collections have been higher than expected. But the agency raised its 10-year deficit forecast from $2 trillion, primarily to reflect additional spending authorized by Congress.

Although the revisions were not huge, the new figures became instant fodder on the presidential campaign trail. Democrats used them to criticize Bush's economic policies, while Republicans said they showed the president's tax cuts were boosting the economy.

"Last week the Bush administration said outsourcing was good, yesterday George Bush said the economy was great, and today George Bush is celebrating a record federal deficit," Democratic presidential nominee John F. Kerry said in a statement. "W stands for wrong, the wrong direction for America," he said, referring to the president's middle initial.

Vice President Dick Cheney countered that the president's tax cuts deserved credit for reducing this year's deficit projection because they stimulated the economy. "We're beginning to see the resumption of economic growth in a fairly significant way," Cheney told supporters at a campaign stop in Des Moines.

The deficit would be a record in dollar terms, exceeding the record set in 2003 when the shortfall was $375 billion. As a share of the national economy, however, it is smaller than the deficits of the mid-1980s and early 1990s. At $422 billion, the 2004 deficit is equal to 3.6% of the nation's gross domestic product, compared with a post-World War II record of 6% set in 1983.

Although there is little evidence that the national debt ranks high on voters' list of election-year concerns, economists said the risks of burgeoning deficits were substantial.

"If you have deficits like this, the debt just keeps rising and rising and rising relative to GDP," or gross domestic product, said Susan Hering, senior U.S. economist in Chicago for UBS, a financial services firm. "It's not a stable situation."

Higher budget deficits intensify the competition between the government and private borrowers, driving up interest rates, she said. "That means you crowd out private investment.... So voters should care," Hering said.

At this point, congressional accountants are slightly more optimistic about this year's deficit than their counterparts in the Bush administration. In July, the White House Office of Management and Budget estimated the deficit would reach $455 billion this year.

Independent budget experts say the size of this year's shortfall is less important than the long-term budgetary outlook. Although both presidential candidates state their intent to reduce the deficit as a percentage of the economy, neither one is offering a plan for putting the federal budget back in the black.

The CBO said it did not attempt to estimate the budgetary effect of Kerry's campaign proposals. The Democratic nominee wants to extend most of Bush's tax cuts for the middle class but rescind those for wealthier taxpayers. Yet several independent economists have said that any savings that would accrue would probably be offset by Kerry's proposals to increase spending on healthcare and education.

Robert Greenstein, director of the liberal Center for Budget and Policy Priorities, said it appeared that the 10-year cost of Bush's economic platform was slightly greater than the cost of Kerry's campaign promises. "But under both sets of proposals, the nation would face significant problems over the next 10 years and beyond," he said.

According to the CBO analysis, extending the Bush tax cuts that are scheduled to expire by 2011 would add $2.2 trillion to the 10-year budget deficit. Scaling back the alternative minimum tax, which is affecting an ever-bigger number of middle-class taxpayers, would cost another $425 billion under one reform scenario.

The alternative minimum tax was created to ensure that wealthy people did not escape income taxes entirely by claiming deductions, but the income level that triggers the tax was not indexed for inflation.

The CBO did not estimate the cost of partially privatizing Social Security, which Bush has endorsed in principle without offering a specific proposal.

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