Deficit lower for short term, analysts say

WASHINGTON -- Congressional forecasters said Monday the federal deficit this year, though still huge, won't be as bad as originally 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 higher 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.

But unlike a competing White House estimate issued last month, 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," said the CBO.

Still, the White House cheered the news. Until this summer, virtually every budget analysis issued by either CBO or the White House over 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 terrorist 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 deficit projected for last year to $260 billion -- into question, since it projects a $321 billion deficit for 2009. That figure may be inflated, since it assumes the war in Iraq will continue to require cash infusions like the $82 billion passed by Congress in May.

Still, even with a phase-out in Iraq and Afghanistan, the deficit would exceed $300 billion the way 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 years 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 previous 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 that 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, CBO assumes that 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 relief law enacted in 2001 expire by 2010, but many lawmakers and the White House assume that 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 CBO's report.

If Bush's tax cuts are renewed, the deficit picture would worsen by $204 billion in 2011 -- to perhaps $327 billion or so. By 2015, the cost of extending the 2001 and subsequent tax cuts would reach $432 billion. Other likely costs, such as making sure the alternative minimum tax won't hit more taxpayers, could combine to keep deficits in the mid-$300 billion range for the next few years.

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