Deficit projected to hit record high this year, then decline

The Congressional Budget Office Monday projected the federal government would run a record $477 billion deficit for fiscal 2004 before reducing the red ink in the following year. The CBO report marked a slight decrease from August's forecast of $480 billion for 2004.

The deficit for 2005 is projected to shrink to $362 billion, an increase from the $341 billion forecast in CBO's last 10-year estimates released in August.

The deficit is now projected to reach $1.9 trillion over 10 years between 2005 and 2014, up from $1.4 trillion as previously estimated. Most of that increase is a result of new spending, such as recently passed Medicare prescription drug legislation. CBO also said the higher projections were a result of changes made to the revenue side, such as tinkering with estimates for unemployment and inflation.

The deficit reached $375 billion in fiscal 2003. For the 2004-13 projection, CBO estimated the deficit would increase to $2.38 trillion, a $986 billion increase since last August's projections. Under the new forecast, the deficit is expected to shrink to $16 billion in 2013 before returning to a surplus of $13 billion in 2014.

The CBO report states that while $477 billion would be the largest in dollar terms, at 4.2 percent of GDP the deficit would equal a smaller share of the economy than the deficits of the mid-1980s and early 1990s.

CBO was careful to note that its projections are based on current laws and policies, and are subject to congressional budgetary maneuvering. CBO Direct Holtz-Eakin stressed at an afternoon briefing that CBO's estimates are based on "a static policy" baseline. Democrats argue that a more realistic scenario would include the costs of making expiring tax cuts permanent and providing relief from the alternative minimum tax.

"Because CBO's projections assume no policy changes relative to current law, they understate the severity of the budget situation," said House Budget ranking member John Spratt, D-S.C. Holtz-Eakin said making the tax cuts perminent would add $2.2 trillion to the deficit over 10 years, and relief from the alternative minimum tax would add another $470 billion.

The Bush administration is proposing to limit discretionary spending growth to 4 percent in 2005, with less than 1 percent increase for non-defense, non-homeland security funding. The administration contends that spending discipline coupled with continued economic growth will curb the deficit.

Spratt said the administration tacked on $102 billion to the deficit in 2004 despite economic growth and Congress' effort to hold close to a 1 percent growth in non-defense spending.

In its report, CBO anticipates "continued robust growth in overall demand" over the next two calendar years as well as more private-sector investment. CBO forecasts real GDP to expand by 4.8 percent in calendar year 2004, up from 3.2 percent in 2003, and by 4.2 percent in 2005 before stabilizing at an average expansion of 2.7 percent annually between 2006-14.

The unemployment rate is forecast to fall from 6 percent in 2003 to 5.8 percent in 2004 and 5.3 percent in 2005, and averaging 5.2 percent from 2006-14.