Budget deficit falls below 2004 record

WASHINGTON -- The federal deficit hit $319 billion for the budget year just ended, down from last year's record red ink though a surge in Katrina-driven spending threatens to drive it up again.

The improvement from the record $413 billion recorded in the 2004 budget year, which the Treasury Department reported on Friday, is largely due to a surge in federal revenues from an improving economy.

The figures were released three days before Congress returns from a recess and commences a struggle to cut $35 billion from federal benefit programs over the next five years to help defray hurricane recovery costs. Friday's deficit figures underscored that even if lawmakers agree to such savings, they would have a barely visible effect on the overall red ink figure.

Despite the improvement from last year's budget gap, the 2005 shortfall was still the third-highest ever recorded. The government's 2005 budget year ended on Sept. 30.

Because hurricanes Katrina and Rita hit in August and September, only about $4 billion of the $62 billion in emergency aid provided for the storms was actually spent in fiscal 2005, according to a senior Treasury official. Congressional analysts figure another $30 billion of those funds will be spent in the budget year that began Oct. 1, though more spending is likely to be approved in coming weeks.

The most recent White House estimate for the new fiscal year projects a $341 billion deficit, but that was issued before the hurricanes hit.

Republicans emphasized that the figure was an improvement from earlier deficit projections.

At the beginning of this year, the White House projected a $427 billion shortfall for 2005, which would have set another record in sheer dollar terms. The Congressional Budget Office forecast a gap of $365 billion, although both lowered their forecasts as the year progressed.

The improvements were due to a surge of 15 percent in federal revenues over 2004 levels. Meanwhile, spending went up 8 percent.

"Lower taxes and pro-growth economic policies have created millions of jobs and a growing economy that has swelled tax revenues over the past year," said Treasury Secretary John Snow. "While deficits are never welcome, the fact that we finished FY 2005 with a much lower-than-expected deficit is encouraging news."

The White House and most economists say the truest measure of the deficit is relative to the size of the economy. In those terms, the deficit measured 2.6 percent of gross domestic product. The 2004 deficit, by contrast, equaled 3.6 percent of GDP. That is well below the post-World War II worst-ever record, a 6 percent figure set in 1983 under President Reagan.

Democrats say that despite the improvement over 2004, the administration's record on the deficit isn't anything to be proud of. They add that congressional forecasts that factor in costs such as the war in Iraq, adjustments to the alternative minimum tax and the enactment of personal Social Security accounts, the deficit rises well above White House estimates.

"The deficit in 2006 is almost certain to increase, because the bulk of spending for Katrina and Rita will occur in 2006," said Rep. John Spratt Jr. of South Carolina, top Democrat on the House Budget Committee. "What's worse is that when the Congressional Budget Office factors the Bush agenda into the budget, CBO sees the deficit doubling to $640 billion in 2015."

Indeed, the deficit picture remains far worse than when President Bush took office in 2001, when both White House and congressional forecasters projected cumulative surpluses of $5.6 trillion over the subsequent decade. Then, the White House forecast a surplus for 2005 of $269 billion.

Those earlier estimates assumed the revenue boom fueled by the surging stock market and worker productivity gains would continue. But that bubble burst and a recession and the Sept. 11, 2001, terrorist assaults adversely affected the books.

Several rounds of tax cuts, including Bush's signature $1.35 trillion, 10-year 2001 tax cut also contributed to the return to deficits three years ago after four years of surpluses.

The White House has set a goal of cutting the deficit in half from the $521 billion prediction for 2004 that it issued at the beginning of that year.

The administration says it is still on track to reach that $260 billion goal by the time Bush leaves office. But administration budget projections leave out the long-term costs of occupying Iraq and Afghanistan and have yet to be updated with cost estimates of hurricane relief.

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