Two years after the government projected a huge budget surplus over the next decade, the deficit is soaring again as the result of President Bush’s military buildup, his large tax cuts, a sluggish economy and spending pushed by both parties.
New budget estimates from the Congressional Budget Office on Wednesday raised concerns among many analysts that the government could be buried in red ink for the whole decade, perhaps with deficits exceeding $200 billion a year.
This dramatic turnaround in the government’s fiscal picture is prompting Democrats to criticize the Bush administration for squandering the surplus, even though many Democrats also voted for the 2001 tax cuts, higher military spending and their own domestic programs.
Mitch Daniels, Bush’s budget director, spread the word this week that the president’s fiscal 2003 budget, to be released Monday, will show a possible record deficit of more than $300 billion, topping the previous record of $290.4 billion in fiscal 1992.
With the current economic downturn and potential military confrontation with Iraq, there is little concern about higher government deficits among economists and Bush administration officials. But if deficits persist after the current economic sag, many economists fear they will drain the funds to finance Social Security and Medicare in the future and squeeze private capital used for job-creating private investment.
David Wyss, an economist at Standard & Poor’s in New York, said large annual deficits “are nothing to leap off a cliff about” but would cause slower economic growth and possibly higher interest rates in the future.
The Congressional Budget Office, a non-partisan arm of Congress, reported Wednesday that the budget deficit in fiscal 2003, which ends Sept. 30, would rise to an estimated $199 billion. In 2004, it said, the deficit would be $145 billion. A surplus would not return until 2007, according to its projections.
But the CBO’s numbers leave out a new economic stimulus package, the cost of a war with Iraq, Bush’s new $400 billion, 10-year plan to pay for a prescription drug program for senior citizens, new spending for homeland security and AIDS, and other spending proposals. The estimates also do not include plans to make Bush’s $1.35 trillion, 10-year tax cut permanent.
Factors add up to deficits
Crank all these figures in, said Rep. John Spratt (D-S.C.), an assistant Democratic leader and House Budget Committee member, and it means the budget will be in deficit indefinitely.
Yet Democrats also have promoted a bigger deficit, putting forward their own economic stimulus package, supporting a prescription drug benefit and backing the president’s military buildup.
Robert Reischauer, president of the Urban Institute and a former CBO director, said that he did a “little back-of-the-envelope figuring” after he reviewed Wednesday’s new budget estimates, and calculated that the deficit in fiscal 2004 would reach almost $300 billion. After that, he said, deficit would fall back to about $200 billion and remain at that level “in perpetuity.”
“It would seriously undercut the long-term economic growth of the country, and leave us with very little ability to deal with emergencies and emerging priorities,” Reischauer said.
“The answer to this is relatively simple. We shouldn’t be reducing our taxes,” he added.
The political cost to Bush, if any, of the escalating deficits is unclear, because to many voters the federal deficit is an abstraction. Still, some critics, such as Sen. Kent Conrad (D-N.D.), his party’s senior member on the Senate Budget Committee, are trying to make Bush pay a price by accusing him of squandering the surplus.
In the 1990s, independent candidate Ross Perot and then-President Bill Clinton convinced large segments of the public that deficits were a major economic problem. It remains uncertain whether anyone will articulate that viewpoint so successfully this time around.
And some see a continued need for spending and tax cuts despite the effect on the deficit. Rep. Jim Nussle (R-Iowa), chairman of the House Budget Committee, said the government should stick to its agenda to strengthen the economy and battle terrorism.
“Our budgets need to look beyond the next election and toward the next generation,” Nussle said.
Daniels, the Bush budget director, said the White House budget would show a cumulative deficit over the next five years, but he added that after a huge deficit in the 2004, the red ink should turn back toward the black.
Red ink to subside
William Niskanen, an economic adviser to President Ronald Reagan and chairman of the Cato Institute, a libertarian think tank, said he believes the economy is picking up steam and that the deficit will subside over the next two years.
Niskanen said he was not concerned about the deficit. In a global economy, with so much foreign capital pouring into the United States, the deficit will not crowd out money needed for private investment and will not cause interest rates to go up, he said.
In his State of the Union speech, Bush said eliminating deficits could best be achieved by encouraging economic growth and exercising spending discipline. But the president has yet to show where he would cut spending, although his budget next week could shed some light on that subject.
Most economists say large budget deficits during an economic downturn are not a major concern. In fact, deficits help by causing the government to spend more for goods and services, raising annual economic output. Payments for unemployment compensation and food stamps, for example, put money in people’s pockets.
“In the short run, I am not worried about the deficit,” said Wyss. “The problem is when you get back to full employment.”
Wyss agreed with Reischauer that the deficit is beginning to look permanent unless something is done, saying, “Some future generation may again see a balanced budget.”
While the size of the projected deficits rivals those of the Reagan era, relatively speaking they are not as large.
According to Daniels, the deficit in fiscal 2004 will be close to 3 percent of the nation’s annual economic output of $10.5 trillion. In 1983, the deficit rose to 6.1 percent of annual economic output, and it was nearly 5 percent for most of the 1980s.
Deficit-reduction programs in the late 1980s and 1990s, along with an economic boom, erased the budget deficit in the late ’90s. Using rosy economic projections, the Congressional Budget Office estimated at that time that the government would run a $5.6 trillion surplus, including Social Security trust funds, by 2011.
Now, said Spratt, those projected surpluses are all gone. But to many economists, the surpluses were illusory projections to begin with, based on overly optimistic forecasts about capital gains taxes during the late stages of the economic boom.
