Global Policy Forum

Jonathan Weisman

This year's federal budget deficit will reach a record $422 billion, and the government is now expected to accumulate $2.3 trillion in new debt over the next 10 years, the Congressional Budget Office reported yesterday.

The expected deficit for the current fiscal year, which ends Sept. 30, is $56 billion less than the CBO predicted in March, as a recovering economy added to tax receipts. But it is $46 billion more than last year's record shortfall, with even more red ink possible, the nonpartisan agency reported: The expected total 10-year deficit would climb from $2.3 trillion to $3.6 trillion if President Bush is able to extend the tax cuts he enacted. They are currently set to expire in 2011.

"This is a fiscal situation in which we cannot rely on economic growth to cause deficits to disappear," warned CBO Director Douglas Holtz-Eakin, a former economist for the Bush White House. "The budgetary outlook will be dictated by policy choices." About half of the projected 10-year deficit is based on an assumption that conflicts in Iraq and Afghanistan will continue. The CBO policy requires that deficit projections be based on current conditions.

The budget office expects that the total federal debt held by the public -- the amount borrowed through the sale of Treasury bonds to finance overspending -- will balloon 58 percent over the next decade, from $4.3 trillion this year to nearly $6.8 trillion in 2014.

The CBO's findings may refocus some political attention on the fiscal health of a federal government that, between recession, war and tax cuts, has swung from record surpluses to record deficits since Bush took office.

Both political parties seized on the CBO's findings, with Republicans stressing the $56 billion improvement over the CBO's March estimate, and Democrats focusing on the longer-term forecast. The new estimate is "a sign of the economic growth that is a result of President Bush's leadership on tax relief," said Tim Adams, policy director for the Bush campaign. Democratic presidential nominee John F. Kerry retorted, "Only George W. Bush could celebrate over a record budget deficit of $422 billion." Budget analysts said the report should not be seen as good news to either side inasmuch as neither has a detailed plan to tackle the deficit.

"It's another one of those unwelcome reminders to the candidates that they've got some serious problems that they don't want to face," said Robert Bixby, executive director of the Concord Coalition, a budget watchdog group.

Bush has pledged to halve the deficit over the next five years. But absent sharp policy shifts, the CBO does not expect the president to meet that goal. The CBO estimated the annual deficit for 2009 to be $312 billion, short of the president's target. Compared with the size of the economy, the deficit in five years would fall to 2.1 percent of gross domestic product from its current 3.6 percent, a substantial improvement but not half of the 2004 level.

Chad Kolton, a spokesman for the White House Office of Management and Budget, said the CBO figures are deceptive because they include far too much money for continued fighting in Iraq and Afghanistan. The CBO assumed both conflicts will continue for the next 10 years, at a cost of $1.1 trillion. "The bottom line is, the president is committed to cutting the deficit in half in five years," he said.

The CBO report drew the policy choices facing the nation in sharp relief. The $2.3 trillion in projected deficits over the next decade assumes that all of Bush's 2001 tax cuts expire as scheduled in 2011 and rates rise to the levels that existed before. If the president and congressional Republicans are successful in extending the tax cuts, deficits would surge to $3.6 trillion through 2014, the CBO report said. In 2014 alone, a relatively modest annual deficit of $65 billion would leap to $440 billion if all the tax cuts are kept.

The alternative minimum tax, which was created to ensure the wealthy pay income taxes but which will increasingly ensnare the middle class, presents another fiscal strain. Reforming the law to exclude more middle-class taxpayers -- which both parties say is a priority -- would cost the government at least an additional $425 billion over the next 10 years, and possibly as much as $602 billion, the CBO said.

By then, the cost of the retiring baby-boom generation will have hit the government hard. Social Security and Medicare, currently $789 billion, or 34 percent of federal spending, will swell to $1.5 trillion, or 42 percent of the budget.

Neither Bush nor Kerry has detailed how he would tackle the deficit. Both candidates have made campaign pledges that probably would worsen the government's fiscal position, although the candidates have been careful to avoid a detailed accounting.

In Bush's acceptance speech in Madison Square Garden on Thursday night, he reiterated a call to allow younger workers to invest some of their Social Security payroll taxes in stocks and bonds through personal investment accounts. Because virtually all Social Security taxes are used to pay the benefits of current retirees, any diversion of those taxes would have to be made up through more government borrowing. Even a small diversion of, say, 2 percent of payroll taxes, could cost the government as much as $2 trillion in the first 10 years, according to the Social Security Administration's actuary.

Bush has also called for new Lifetime Savings Accounts, which would effectively end the taxation of capital gains, dividends and interest for all but the richest Americans. Individuals could shield from taxation the investment gains of as much as $7,500 of savings a year, and those savings could be withdrawn at any time for any reason. The cost of the proposal would be minimal in the first decade but could swell to $50 billion a year in later decades, according to the Congressional Research Service.

Kerry has pledged to roll back some of the tax cuts passed in 2001 and 2003, including income tax, capital gains and dividend cuts that have benefited households with incomes of more than $200,000. But the savings from those tax increases would be consumed by a $653 billion expansion of health care coverage, a $200 billion education program and other promises.

"Neither one of them is focused on deficit reduction, and neither one of them is focused on hard choices," Bixby said. "And the message of today's report is that tough choices are needed."