Deficit Predictions Soar with Bush Plans:
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-- "We're looking at deficits forever," Wyss said. --
Deficit Predictions Soar With Bush Stimulus Plan
Economists Say a Record Shortfall Is Likely
By Jonathan Weisman
Washington Post Staff Writer
Friday, January 10, 2003; Page A01
President Bush's 10-year, $674 billion economic growth package -- coupled with a war with Iraq -- would push the federal budget deficit well into record territory next year, and possibly as high as $350 billion, private-sector budget forecasters said yesterday.
Measured against the size of the economy, a $350 billion deficit would still be smaller than the deficits of the late 1980s and early 1990s. But in sheer dollar terms, it would easily eclipse the $290 billion record set in 1992, the last year of George H.W. Bush's administration. It also would be a steep fall from the record $236 billion surplus of 2000.
Moreover, the deficit's rapid rise is coming just a few years before the baby-boom generation begins to make itself felt on federal spending, said David Wyss, chief economist at Standard & Poor's DRI.
"I don't think it's a near-term concern," Wyss said. "But people are starting to think about it as a real long-term issue."
"The collision course is pretty easy to see," said Diane Swonk, chief economist at Bank One Corp. in Chicago.
The impact on the long-term budget picture is likely to be the central issue in the debate in Congress over the president's proposal, which was presented in Chicago on Tuesday.
"Tax cuts are not free," said Sen. John Breaux (D-La.), a key Bush ally in the battle over his 2001 tax cut.
That year, when Bush proposed a 10-year, $1.6 trillion tax cut, lawmakers believed the cost would be easily covered by the $5.6 trillion budget surplus that forecasters were anticipating through the end of this decade.
But those rosy predictions have evaporated. This time, the president's proposal is being offered in the teeth of rising deficits.
Democrats -- and a few Republicans -- argue that any economic stimulus package should be a one-time cash injection into the economy that does not have a long-term impact on the federal budget deficit.
But Bush has said that sustained economic growth will take fundamental changes in the tax system and a package large enough to get the notice of a $10.5 trillion economy.
"The mule needs a kick, not a love tap," said Trent Duffy, a spokesman for the White House Office of Management and Budget.
The centerpiece of the Bush plan -- a provision to exempt dividends from "double taxation," first at the corporate level, then at the individual level -- could lead to significant changes in corporate finance and governance.
But those changes, while relatively inexpensive upfront, would have significant long-term costs to the Treasury. Bush said yesterday that his plan would inject $59 billion in cash into the economy this year, considerably less than the $102 billion initially stated this week. That larger figure includes money that taxpayers will see in the form of rebate checks after they file their imcome-tax returns next year, said White House spokeswoman Claire Buchan. But the plan grows considerably in 2004.
"There's no question that the growth plan will have an impact on the deficit," Duffy said, "but we have other deficits, a deficit of jobs, a deficit of paychecks. The president is very concerned about the deficit, but we need to put in place long-term growth to get the revenues back in place."
Assuming a relatively quick and inexpensive war and full implementation of the Bush tax cut, Wyss said the deficit should reach $275 billion in 2003, compared with the $109 billion deficit projected by the White House in August. By 2004, that number would reach $350 billion.
Those numbers are identical to estimates released yesterday by Morgan Stanley Dean Witter chief economist Richard Berner. Bank One and Economy.com, an economic research firm in Pennsylvania, have developed deficit forecasts that are slightly lower but still more than $300 billion. Merrill Lynch economists met with congressional forecasters yesterday to present a range of numbers that were roughly in line with the other Wall Street projections, a congressional aide said.
The Congressional Budget Office and the White House hope to release their forecasts late this month and in early February. Both predicted in August that the deficit would fall in both 2003 and 2004, to as little as $48 billion. But an administration official said the deficit in 2003 would grow larger than the $157 billion mark posted in 2002.
On Wall Street, the mood of forecasters has been bleak for some time. Wyss called his projections "very conservative" because they use an "everything goes right" war. He also said he believes the White House has understated its dividend tax proposal by as much as 50 percent, because administration forecasters have not sufficiently accounted for the cost of one obscure provision that effectively grants a capital gains tax cut when investors sell stock in companies that elect not to pay dividends.
Treasury officials said their estimates are accurate.
Mark Zandi, Economy.com's chief economist, said the president's proposal to end taxation on corporate dividends, coupled with tax cuts already enacted, would "significantly overwhelm the fiscal situation" within six years.
"The next president will have some very difficult decisions to make," Zandi said. "We're heading in the wrong direction."
Many economists say the swelling deficit should have little negative effect on economic growth this year or next. Federal budget deficits do tend to raise long-term interest rates, making it more expensive for businesses to borrow and invest, Berner said. But, he added, as long as economic growth is slow, the private sector's demand for investment money will stay low. Only when the economy significantly heats up would the competition between the federal government and private companies for lenders significantly boost interest rates.
Bush administration economists say the economic growth that could create that competition would also lead to a surge in tax dollars that will bring the federal budget back into balance.
That view does not take into account the demands that baby boomers will place on the Social Security and Medicare systems, private forecasters say.
"We're looking at deficits forever," Wyss said.
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