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Budget Office Expects Deficit to Edge Up

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By Jonathan Weisman
Washington Post Staff Writer
Friday, January 27, 2006

After a year of political battles over budget cuts and pork-barrel spending, the federal budget deficit will be slightly higher than a year ago, with red ink ending in 2012 only if President Bush's tax cuts are allowed to expire, the nonpartisan Congressional Budget Office said yesterday.

The CBO forecast a $337 billion deficit for this fiscal year and lingering deficits through the end of the decade, offering a pessimistic backdrop as Bush prepares to release his 2007 budget request in the coming weeks. The deficit fell to $318 billion last year after three years of sharp increases, and Republicans had hoped the tide of red ink was finally receding. But spending on hurricane relief will push the deficit back up in 2006.

Additional spending on the war in Iraq and federal flood insurance claims, not counted in CBO's official projection, is likely to leave the deficit around $360 billion by Sept. 30, when the current fiscal year ends, said the acting CBO director, Donald B. Marron. And that deficit will come despite strong economic growth and rebounding tax receipts.

Assuming a phase-down of troops in Iraq and an extension of expiring tax cuts, the CBO projected that Bush will not meet his goal of cutting the deficit in half by 2009. Indeed, under those assumptions, the deficit would dip no lower than $222 billion before swelling back to more than $300 billion by 2016. These projections do not include a fix, promised by both major parties, to the increasingly onerous alternative minimum tax. That would keep the average deficit well above $300 billion over the next 10 years, with the red ink topping off at $405 billion in 2016, CBO projections say.

"Not much has changed," said Marron, who recently joined the agency after serving as a senior economist in the Bush White House.

That conclusion came after a legislative year dominated by budget fights. A bill to cut nearly $50 billion from entitlement programs such as Medicare and Medicaid brought out deep divisions in the Republican Party and has yet to win final passage. In November, a spending plan for federal health, education and labor programs was initially defeated in the House -- the first such setback in nearly a decade -- over objections to program cuts and the elimination of all home-district pork-barrel projects.

The CBO forecast will challenge Republicans to cut still deeper in an election year, especially because Bush once again urged making the tax cuts permanent. Such a fight would pit fiscal hawks against moderate Republicans reluctant to slice further into social programs and against GOP leaders who have used home-district spending to bolster the reelection chances of members in marginal districts.

"I'm fully prepared to use a veto if they overspend," Bush warned Congress yesterday. "We've still got a lot of work to do, don't get me wrong. And I'll present a . . . budget that will continue to eliminate programs that don't work or that are duplicative in nature, one that says we can cut our deficit in half by 2009 and make sure the American people still get their tax relief."

The forecast will also fortify Democratic charges that budget cuts will never suffice until Republicans accept that the deep tax cuts of Bush's first term must be reversed, at least partially.

"The current structure we have on taxes and spending is simply unsustainable," Marron said. "I don't think there's any question about that."

The $360 billion deficit forecast is in line with many private-sector projections, although it is lower than a recent White House forecast that put this year's deficit at more than $400 billion. Those projections have reinvigorated GOP calls for spending restraint.

Even before last year's spending-cut package receives final approval from the House, Senate Budget Committee Chairman Judd Gregg (R-N.H.) said this week that Congress should go further this year.

"Today's report from CBO indicates that despite strong economic growth, the deficit remains high and mandatory spending continues to grow at a rapid rate," he said. "In a very short period of time, our nation will face a financial crisis because the federal government has made commitments to America's retirees that threaten to overwhelm our economy. It is critical that we continue to hold the line on spending to put our fiscal house back in order."

But Rep. John M. Spratt Jr. (S.C.), the ranking Democrat on the House Budget Committee, said continuing deficits in the face of robust economic growth show that changes in spending and taxes are necessary to pull the nation out of its expanding debt burden. By Spratt's calculation, the current course would push the deficit to $528 billion by 2016. To reach that level, Spratt assumed Bush's tax cuts would be extended, the wars in Iraq and Afghanistan would slowly phase down, Bush's planned defense buildup would continue, last year's budget-cutting bill would pass in the coming weeks, and Congress would fix the alternative minimum tax, a parallel income tax set up to hit the wealthy but increasingly ensnaring the middle class.

In a polarized election year, few lawmakers from either party believe much work will be done to reach a bipartisan consensus on cutting spending and raising taxes to quickly address the budget problem. In the week between Christmas and New Year's Day, Treasury Secretary John W. Snow notified congressional leaders that the government would reach the statutory debt limit of $8.2 trillion by mid-February, the fourth time in five years the debt limit will have been reached.

"At that time, unless the debt limit is raised or the Treasury Department takes authorized extraordinary actions, we will be unable to continue to finance government operations," Snow warned.

Spratt and Rep. Charles B. Rangel (D-N.Y.) replied this month with a request to discuss a long-term plan to put the budget on track toward balance. Spratt said Snow has declined.

"You know, people say, well, let's raise the taxes and balance the budget -- that's not how it works," Bush said. "They're going to raise your taxes, and they're going to continue to expand the government. And I understand that."


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