The federal government, burdened by war costs, falling tax receipts and the likelihood of explosive growth in health care spending, faces chronic deficits that only dramatic policy shifts can reverse, according to lawmakers, budget analysts and business leaders.
The deterioration of the government's fiscal position was underscored yesterday when the Congressional Budget Office released a new estimate of the cost of President Bush's budget plan. Without any of the president's spending or tax proposals or a war with Iraq, the government would run a 2003 deficit of $246 billion, a figure that is $47 billion -- or 24 percent -- higher than the deficit that the CBO projected just two months ago.
If Bush's proposals were enacted, the CBO said, the deficit would rise to $287 billion this year and $338 billion in 2004, and the government would remain in deficit through 2013, just as the vanguard of the baby boom generation begins to retire. Altogether, the CBO concluded, the president's policies would leave the government with $2.7 trillion in debt through 2013, which the government would not realize if Bush's proposals were rejected.
Those figures do not include the cost of a war with Iraq or its aftermath. Like the deficit figures, such cost estimates have also escalated sharply in recent weeks, to as much as $95 billion.
Moreover, the administration has scaled back efforts to rein in the growth of Medicare spending. Health and Human Services Secretary Tommy G. Thompson acknowledged this week that Bush's $400 billion proposal to overhaul Medicare and add a prescription drug benefit would hasten the program's slide toward insolvency.
"There's a massive deterioration of the budget going on," warned Edward McKelvey, an economist at Goldman Sachs.
The drumbeat of bad fiscal news is beginning to lead to alarm that goes beyond partisan finger-pointing in Washington. Neutral budget experts, Wall Street analysts and even some business leaders are beginning to implore policymakers to pay attention to a worsening budget picture that threatens to spiral out of control.
"We should not be going blithely down the path of this [Bush budget] plan without thinking about the demographic challenges ahead, without thinking about the costs that states are facing in these trying times, without thinking sufficiently deeply about how much this new role we're playing in the world is going to cost us," said Landon H. Rowland, chairman of the mutual fund giant Janus Capital Group, who contributed to Bush's 2000 presidential campaign. "It's my job as a citizen to look at this and say, 'Hey, this isn't going to cut it.' "
In the short term, Bush administration officials and most economists believe that the current deficit projections are acceptable as the economy struggles to regain its footing and the nation prepares for possible war.
But the CBO's newest forecast indicates that current and proposed policies will saddle future presidents and Congresses with intractable, long-term deficits just as the retiring baby boom generation places even higher demands on government resources. And some analysts say Bush's pursuit of additional tax cuts is bound to make matters worse. Bush's 2004 budget calls for tax cuts estimated to cost the Treasury nearly $1.6 trillion through 2013, and the cost of some of those provisions would escalate steeply from there.
"The magnitude of this is now so great as to be inescapable," said Everett M. Ehrlich, director of research at the Committee for Economic Development, a business and civic organization that has been around for 56 years. "Washington will only address this issue when it's forced to do so, and the business community has to begin paying attention."
Administration officials remain sanguine about fiscal issues, both in the short term and the longer term. Treasury Secretary John W. Snow dismissed the cost of an Iraq war and its aftermath on Thursday as "a one-time sort of thing." He said: "We don't have a revenue problem. We have plenty of revenue growth."
White House budget director Mitchell E. Daniels Jr. acknowledged the clamor for a shift in fiscal direction. In the face of the White House's own worsening deficit projections, the president considered dropping the plans for an economic stimulus package altogether, Daniels said. But Bush decided that only by giving the economy a boost could the government expect tax revenue to revive.
"We hear the noise, but the logic for the president is still the same," Daniels said. "You could bet the ranch on the economy we've got, or knowingly take on more deficit to create the jobs and growth that will create a stronger economy. He opted for action."
But the pressure for a reversal of course is mounting. The Committee for Economic Development broke this week with a publicly united business community to release a report, on the rapidly deteriorating fiscal situation, that "strongly opposes" Bush's $726 billion "economic growth" package.
Even before the report was released, moderate Republicans in the Senate had begun a series of meetings with Democrats and Senate Majority Leader Bill Frist (R-Tenn.) to raise their concerns over the burgeoning budget deficit and the tax proposal's potential impact on it.
"Does this indicate a sea change?" a senior Senate Republican aide asked after reading the report. "Well, listen, the tides have been going out ever since the president introduced the proposal."
House Republicans are considering an attack on the deficit from the spending side, openly complaining that the president has done too little to control government growth.
"The rate of growth in the president's budget is higher than advertised," said House Budget Committee Chairman Jim Nussle (R-Iowa), who hopes to unveil a budget blueprint on Wednesday that would bring the government back into balance within a decade.
Congressional Democrats are pressing their case daily that the White House's push for a new round of tax cuts proves that the administration has lost touch with reality.
"We're at war on terrorism. We're apparently about to go to war on a second front. We have a major problem on the horizon with North Korea. And yet the budget debates all seem to be around a supply-side tax cut that will reduce the revenues of this country at exactly the wrong time," said Rep. Charles W. Stenholm (Tex.), a conservative Democrat often on Bush's side. "It's out of control."
The deterioration of the government's fiscal health appears to be worse than indicated by the official forecasts of the CBO and the White House. Even with the continued deterioration, the CBO still foresees a slow recovery that would push the government back into surplus in 2008. Under that "baseline" forecast, the government would be running surpluses exceeding $405 billion by 2012.
But that positive trajectory assumes spending and tax policies that even the administration says are unrealistic: no war with Iraq, no more tax cuts, no prescription drug benefit for Medicare, spending growth that only keeps up with inflation, and the earlier tax cuts are would be allowed to vanish by 2011.
If the 2001 tax cuts are phased in immediately and are made permanent instead of being allowed to expire in 2011, a balanced budget would be pushed off to at least 2009. The government has also pledged to fix the alternative minimum tax, a parallel tax system designed to ensure that the affluent pay taxes but which increasingly ensnares the middle class. If politicians make good on that promise, the government would remain in deficit in 2013.
If Bush's proposals were enacted, including his relatively tight spending plan, the 2013 deficit would be $102 billion, according to yesterday's CBO forecast. If government spending at the annual discretion of Congress grows with the economy, as has historically happened, deficits would still be greater that $300 billion a year a decade from now, just as the baby boom generation begins to make its retirement felt.
By 2013, the CBO projects that spending on Social Security, Medicare and Medicaid -- the largest programs for the elderly -- will have reached $1.7 trillion, or 53 percent of the budget, up from this year's 42 percent.
"If we're going to go into the period of 2012 on without a surplus, you have a real structural problem," McKelvey said.
Even those numbers do not factor in war and reconstruction in Iraq and the rapid rise in defense spending that CBO economists fear are now inevitable. By locking the military into a variety of new weapons programs, such as a ballistic missile defense system, the administration's defense plan would push defense spending from about $349 billion last year to $408 billion in 2007, according to a recent CBO report.
Then, in inflation-adjusted dollars, defense costs would average $428 billion a year between 2008 and 2020, higher for 12 years than they were at the peak of President Ronald Reagan's Cold War defense buildup.
Daniels, director of the Office of Management and Budget, said he is not worried about "the dimension of today's deficits, and tomorrow's for that matter."
"They didn't produce disaster before," he said. "They won't this time, either."