Painting a Rosy Budget Picture

By Michael Abramowitz and Peter Baker
Washington Post Staff Writers
Wednesday, October 11, 2006

MACON, Ga., Oct. 10 -- The federal budget deficit shrank from $318 billion to less than $260 billion in the fiscal year that concluded in September, officials disclosed yesterday. It marks the second year in a row that the deficit has declined after ballooning in the early years of the Bush administration.

White House officials hailed the improving short-term budget picture as a vindication of President Bush's tax-cutting agenda, though the long-term prospects are considerably bleaker, given the escalating costs of health-care and retirement programs and, in the view of many economists, the red ink produced by tax cuts.

Bush pointed to the declining budget deficit in remarks Tuesday evening at a fundraiser in Georgia, where he once again sought to frame next month's midterm elections in part as a referendum on tax cuts that he says have stimulated revenue. The nation "has got this choice to make," Bush told donors here. "Do we keep taxes low so we can keep this economy growing, or do we let the Democrats in Washington raise taxes and hurt the economic vitality of this country?"

The president will step up his efforts to tout the economy at a White House event Wednesday, when officials said he will announce that he has met his target of cutting the deficit in half over five years -- three years ahead of schedule.

That promise was based on what officials once projected would be a $521 billion deficit in 2004. One senior White House official, who spoke on the condition of anonymity because the president has not officially announced the numbers, said the deficit for 2006 will be less than $260 billion, "with a significant margin." The Congressional Budget Office estimated last week the deficit would be $250 billion.

One reason the goal was achieved is that the bar was set low. As the economy improved, the $521 billion deficit never materialized, and the government ended 2004 with a $412 billion deficit. Moreover, Bush's policies, including the tax cuts and war spending, helped wipe out the surplus that his administration inherited from the Clinton administration in 2001; Democrats point out that the government was supposed to be running a $300 billion surplus this past year, so in effect, they say, there has been a downward swing of more than half a trillion dollars.

Sen. Kent Conrad (N.D.), the ranking Democrat on the Senate Budget Committee, said the deficit numbers mask the broader problem, which is that the government is using so much in surplus Social Security taxes that it eventually must repay. When that is added to the official deficit numbers, Conrad said, the country had an additional $550 billion in debt last year. "It's amazing how word games have been used to hide from the American people how serious our fiscal situation really is," Conrad said in an interview. "All of the happy talk is just that."

Still, the budget deficit is declining, in large measure because corporate and individual tax receipts have surged at a much faster rate than the government originally projected. The Congressional Budget Office estimated last week that government receipts were up 11.8 percent in 2006, to $2.4 trillion, the second-highest increase since 1981, surpassed only by the 14.5 percent increase last year.

Meeting with reporters last week, White House budget director Rob Portman said: "This economy is strong and growing. The president's pro-growth policies, including the tax relief, are working."

But Robert D. Reischauer, former director of the Congressional Budget Office and now president of the Urban Institute, gave the tax cuts little credit because the economic effect of putting that money back into the economy was offset by the debt incurred from extra spending on the wars in Iraq and Afghanistan and relief from Hurricane Katrina. "The consensus among economists is that the tax cuts of 2001 and 2003 and the extensions have done little to boost economic growth, having been offset by increased spending," he said.

Reischauer agreed that revenue is stronger than most observers expected. "But what we're seeing is the calm before the storm," he said. "Everyone knows that the current revenue and spending structures taken together will be unsustainable as the baby-boom generation begins to enter its retirement years."

Administration officials said the president will continue to talk up the economy as he tours the country in the weeks before the Nov. 7 elections, hoping to overcome voter anger about the war in Iraq and congressional scandals. "In some of the key states and some of the key districts, even within these states, the economy remains the number one issue," said Portman, a former Ohio congressman who remains close to his House colleagues.

Bush was campaigning Tuesday for Mac Collins, a former congressman who is trying to unseat Rep. Jim Marshall in one of the few House races in which the GOP has hope of defeating a Democratic incumbent. Collins aides said they expected the campaign to take in more than $400,000 from Bush's appearance.

Baker reported from Washington.

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