Nation & World: Wednesday, July 16, 2003
Debt forecast to grow by $1.9 trillion over five years
By Seattle Times wire services
WASHINGTON — The federal government will pile up $1.9 trillion in new debt over the next five years and will still be running an annual deficit of $226 billion by 2008, long after White House economists assume current war costs will have subsided and the economy will have recovered, the Bush administration projected yesterday.
Such a precipitous dive into the red could have political repercussions in the short term for the president and longer-term economic consequences for ordinary Americans.
Americans could find the demands of the huge deficits pull needed resources from vital areas.
For instance, the interest that the government pays on its debt are tax dollars that otherwise could be spent on services such as education, highways or parks — or not taken from taxpayers at all.
The OMB estimates that the net interest cost to taxpayers on the national debt this fiscal year will be $156 billion. This year's Environmental Protection Agency budget totals $7.6 billion. That means interest payments on the debt cost taxpayers 20 times as much this year as the government is spending to clean up the environment.
If the economy rebounds as expected, the government's borrowing to cover its deficit could rival private-sector borrowers' need for money to fuel business expansion. That competition for scarce funds could drive up interest rates.
This fiscal year's deficit, according to the White House Office of Management and Budget, is pegged at a record $455 billion, up sharply from $158 billion the previous year. The fiscal year ends Sept. 30.
The deficit is expected to rise to $475 billion in fiscal year 2004, even without additional costs for the occupation of Iraq. It is then expected to dip to $213 billion by 2007 before rising again in 2008, the last year of the White House forecast.
White House budget director Joshua Bolten called the new federal deficit figures "a legitimate subject of concern," but he said the red ink was "manageable."
He offered no proposals to bring the budget back into balance.
"Restoring a balanced budget is an important priority for this administration," he said, "but a balanced budget is not a higher priority than winning the global war on terror, protecting the American homeland, or restoring economic growth and job creation."
Bolten would not concede a point that private budget experts have been making for months: Without significant budget cuts or tax increases, the deficit is now built into the fabric of the government's finances and is here to stay.
"We are truly in a structural deficit as it's usually defined, and this is not going to right itself," said Rudolph Penner, a Republican and former director of the Congressional Budget Office.
There has been a dramatic reversal of the government's fiscal fortunes since President Bush took office in 2001. That year, the government posted a $127 billion surplus, and the CBO projected surpluses between 2003 and 2008 totaling $2.9 trillion. That means projections have shot downward by $4.8 trillion.
Just what caused that erosion is the subject of fierce partisan debate. The White House pinned the blame on three years of sluggish economic growth and the Sept. 11, 2001, terrorist attacks.
Republicans say the three tax cuts they have enacted since 2001 — which will total about $1.65 trillion over 10 years — will boost economic growth and ultimately shrink the deficit.
"The tax cuts proposed by the president and enacted by Congress are not the problem," Bolten said. "They are and will be part of the solution."
Democrats disagree.
Rep. John Spratt, D-S.C., ranking member on the House Budget Committee, said that, from 2001 through 2011, total revenues lost to tax cuts are estimated at $3.7 trillion; deficits during that time are estimated at $3.6 trillion.
"The administration shows no shame, expresses no shock and offers no solutions," Spratt said.
The White House attempted yesterday to downplay the new figures, noting that this year's record deficit equals a smaller percentage of the economy — 4.2 percent — than the record 6 percent in 1983.
But Democrats jumped on the news to accuse Bush and congressional Republicans of promoting a failed economic policy that not only will cause interest rates to rise but also will threaten Social Security and Medicare.
"This is a train that's off the track," said Sen. Kent Conrad, D-N.D., the senior Democrat on the Senate Budget Committee. "This is a ruinous course."
Persistent big deficits threaten to make it harder for the government to retool Social Security and Medicare, which face a financial crunch as the baby-boom generation begins to retire.
The retired boomers' need for Social Security and Medicare will require future working taxpayers to pay somehow, and if the federal budget is already in deep deficit, the pressure on tomorrow's taxpayers will be worse.
That's why it was believed desirable to build budget surpluses in the boom years of the late '90s, to help build a financial cushion for the coming Social Security crunch. That cushion is now gone.
Economists are split on the consequences of the deficits.
John Silvia, chief economist for Wachovia Securities, said he expected them to contribute to a slowdown in housing growth.
"Anyone contemplating financing or refinancing a home needs to anticipate that interest rates will probably go up in the next several months," he said, adding that big deficits also might weaken the dollar overseas. "People on vacation in Europe are going to find that much more expensive."
But James Glassman, an economist at J.P. Morgan Chase & Co., said Wall Street was more interested in the federal budget outlook after the economy has recovered.
"Everybody was resigned to the reality that the deficit would be quite large," he said. "It's a number that has political dynamism but not a number that anybody I know makes much of in the markets."
With home mortgage rates at historic lows, Glassman added, "you'd have a hard time convincing most Americans that there's something wrong with running a deficit right now."
For both Bush and the Democrats, addressing the deficit presents a quandary.
Mindful of his father's deficit-reduction experiences of 1991 and 1992, when President George H.W. Bush broke his "no new taxes" pledge, the president will be loath to reverse course on his own tax cuts. But he has also proved reluctant to demand deep spending cuts and risk alienating moderate voters.
Because the tax cut enacted last month locked in tax reductions that otherwise would have phased in long after next year's election, Democratic candidates would have to advocate raising taxes to have much impact on the deficit. That also is politically perilous.
"We're in a very tough bind now," said Robert Bixby, executive director of the Concord Coalition, a nonpartisan budget watchdog group. "A lot of the stuff that caused this problem has been sort of baked in the cake."
Compiled from The Washington Post, Knight Ridder Newspapers and The Dallas Morning News.
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