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The theory has always been that, at some time in the future, persistent budget deficits will make it more difficult for the government to respond to current problems.

Although no one is admitting it, this is no longer just a theory. It is being proven true right now.

The borrowing Washington does to finance the deficit results in higher interest payments. Unless there is a willingness and ability to tolerate continued deficits in the years ahead, those absolutely mandatory annual interest payments mean that a significant portion of the taxes the government collects each year must be used to pay for past problems and decisions rather than new needs.

Policymakers usually adopt the attitude that the future is too far away to worry about. The truth, however, is that the federal budget deficit is already forcing current needs to be ignored or given short shrift.

For example, Senate Republicans have decided to reduce fiscal 2003 spending by about $9 billion from the levels Senate Democrats approved when they were in the majority last year. They are doing this to support the White House position that the government cannot afford the additional spending because of the deficit. The president also made an executive decision several weeks ago to limit the pay raise for federal civilian workers in part because of budget concerns.

But it's not just spending increases; tax cuts are affected by the deficit as much or more.

Several tax-cut proposals that have been discussed over the past few months have been rejected because they would be too expensive - that is, because the deficit is already too large. A variety of tax-policy changes that might have very positive effects on the overall economy or would address a particular problem have not been considered seriously.

The federal government will spend more than $200 billion on net interest payments in fiscal 2003 because of all of the borrowing it has done in the past to finance its deficits. This extraordinary expense, by far one of the largest in the federal budget, dwarfs the spending increases and tax cuts that have been discussed and rejected.

The more than $3 trillion the government will have to spend on interest payments over the next decade could otherwise be devoted to things that would have a far more positive impact on the economy. Not only could federal taxes be significantly less, but some of the more radical changes in the tax code that have been rejected outright could be considered. Some of the biggest problems facing the country, such as infrastructure, prescription drugs, homeland security and education, could also be dealt with differently.

One of the biggest lost opportunities of the four years when the federal budget was in surplus from 1998 to 2001 is that the value of having greatly reduced annual interest payments was never truly recognized.

But that mistake is now being made even worse by the continuing failure to see that the persistent and increasingly larger deficits that are now being put in place will compound the problem even more in the years ahead. Spending increases and tax cuts that might make sense or be needed in the future are being precluded by the budget decisions being made now. Those additional deficits and the borrowing that will be required to finance them will be significant, which means the initiatives that can be considered will be even more limited.

In recent days Office of Management and Budget Director Mitch Daniels has said that, contrary to earlier forecasts that showed the deficit declining, OMB's new projections will show it increasing to more than $200 billion - and that doesn't include the cost of a war with Iraq. Daniels has also said that, again, contrary to previous projections, he now expects that a surplus will not return anytime soon.

All of this means that the deficits put in place this year will have as big an impact on what happens in the future as any of the debates and votes that take place in those years.

Question Of The Week

Last Week's Question. A budget "function" is a way of looking at the federal budget. All of the programs that serve a particular broad purpose - like "National Defense" or "Community and Regional Development" - are listed in the same function regardless of the department or agency that administers them. The National Defense function, for example, is not the same as the Department of Defense; the function also includes programs administered by the Department of Energy. In addition, some DOD-administered programs are listed in other functions because their primary purpose is something other than defending the country.

The winner of the all-new and incredibly sexy "I Won A 2003 Budget Battle" mouse pad is Karen Strohecker, who works for the U.S. Patent and Trade Mark Office in Virginia. Honorable mention (but no mouse pad) goes to Alan Lopatin of Ledge Counsel in Washington. According to Alan, a budget function is a fundraiser held for Senate Budget Committee Chairman Don Nickles, R-Okla.

This Week's Question. It is about two weeks before President Bush sends his fiscal 2003 budget to Congress so it is time to ask one of the favorite (and easiest) questions "Budget Battles" asks each year. You don't have to know anything about the budget to make a guess. The question: What be the color of the cover of the fiscal 2004 Bush budget? Send your response to scollender@nationaljournal.com by 5 p.m. PST on Saturday, Jan. 25. You must include your mailing address with your entry so the mouse pad can be sent if you win. If more than one person submits the correct response, the winner will be selected at random from all those who have the right answer.

CANCELED: "Houston, We Have A Budget"

"Houston, We Have A Budget," the executive briefing on the fiscal 2004 budget debate that had been scheduled for Jan. 28, has been canceled due to scheduling problems. Contact Beverly Campbell at 202-828-9712 or campbelb@fleishman.com with any questions.

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