Revenue Surge Shrinks Deficit

By Jonathan Weisman
Washington Post Staff Writer
Thursday, July 14, 2005

The federal budget deficit will slip to $333 billion this fiscal year, from $412 billion in 2004, as a surge of unanticipated tax receipts pushes the red ink significantly below levels projected just five months ago, White House officials said yesterday.

The midyear budget forecast also shows that President Bush is on track to reach his goal of halving the deficit a year before his deadline of 2009. By 2008, the White House forecasts that the deficit will fall to $162 billion, or 1.1 percent of the gross domestic product (GDP). A slight rise projected for 2010 reflects the initial cost of Bush's proposal to add private investment accounts to Social Security.

"It's a sign that our economy is strong, and it's a sign that our tax relief plan, our pro-growth policies, are working," Bush said after a Cabinet meeting at the White House.

In dollar terms, the 2005 deficit of $333 billion would still be the third highest on record. That figure relies on the expenditure of about $173 billion in surplus Social Security taxes that must be repaid when baby boomers enter their retirement years. Sen. Jim DeMint (R-S.C.) called the deficit numbers "misleading" because "Congress is raiding Social Security to mask the true size of the deficit," which he says should be more than $400 billion.

But the change from February's projections is dramatic. Then, the White House foresaw a record deficit of $427 billion, equal to 3.5 percent of the GDP, for the fiscal year ending Sept. 30. Under that forecast, the deficit would have risen for the fourth straight year, from the $128 billion surplus Bush inherited in 2001. Now, the deficit is expected to finally begin receding, and it would come in at 2.7 percent of the GDP, smaller in those terms than the deficits of 15 of the past 25 years.

"The U.S. budget deficit is falling, and it's falling fast," said White House budget Director Joshua B. Bolten.

Independent budget experts cautioned that a number of debatable assumptions underpin the White House's deficit projections. The improved budget picture for 2005 is almost all the result of $87 billion in unanticipated tax receipts, much of which may have resulted from one-time events, such as a one-year corporate tax holiday enacted last year.

Congressional Budget Office Director Douglas Holtz-Eakin said last week that such events probably will not make much difference for the budget picture by the end of the decade. But the White House assumes that tax receipts will come in an average of $82 billion higher in each of the next five years than the administration forecast in February. A White House budget official called the assumption "eminently reasonable," because tax receipts rarely decline even from elevated levels in an expanding economy.

The White House does include $37 billion in Iraq and Afghanistan war costs for 2006 and $13 billion in 2007, but Bolten said those costs will certainly be higher. The projection does not include additional expenditures to fix the alternative minimum tax (AMT), a parallel income tax enacted to ensure the rich pay taxes but one that increasingly ensnares the middle class. Bolten acknowledged the AMT needs to be fixed but said it should be part of an overall tax revision effort that does not change total tax revenue.

The White House also assumed that interest rates over the next five years will be considerably lower than those projected by the private sector. Lower interest rates would shrink payments due on the expanding federal debt. Such payments have already risen 14.5 percent over the level at this time last year, as the Federal Reserve Board raises rates, according to the CBO. And Anthony M. Santomero, president of the Federal Reserve Bank of Philadelphia, warned yesterday that rates are likely to continue their rise.

Moreover, Bolten said, the real strains on the federal budget deficit will be seen beyond the administration's five-year window, when retiring baby boomers begin driving Medicare and Social Security expenditures dramatically higher.

"Don't be deceived," warned U.S. Comptroller General David M. Walker. "We face large and growing structural deficits in the long term that are getting worse every day, and it's time that we start to address them."

Republicans boasted that the improved outlook vindicated their drive to cut taxes in each of the last four years, claiming that much of the boost in tax revenue was the result of economic growth stimulated by the tax cuts. The White House used the news to resume its push to make permanent tax reductions set to expire at the end of 2010.

"There's no doubt that the effect of the tax cuts . . . have been an enormous factor in producing the additional income that has found its way now into the federal treasury," Bolten said.

Rep. John M. Spratt Jr. (S.C.) and Sen. Kent Conrad (N.D.), the ranking Democrats on the House and Senate Budget committees, agreed that the short-term numbers are a marked improvement. But Senate Minority Leader Harry M. Reid (D-Nev.) said the administration was "claiming credit for an F-plus in fiscal management."

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