The Deficit Balloon

Emphasizing the need for a balanced budget agreement, the Congressional Budget Office will estimate today that the federal deficit will balloon to $278 billion in 2007 if Congress and the Clinton administration do not reach a budget deal.

In testimony prepared for delivery today to the Senate Budget Committee, CBO Director O'Neill will say that while the deficit shrank to $107 billion in FY96, the fourth straight year of decline, it will grow to $124 billion this year and to $188 billion in 2002 without a balanced budget agreement.

Nonetheless, the testimony is expected to have some good news: Congress will only have to find $154 billion in savings in 2002 to reach balance, some $56 billion less than the budget office estimated was needed in May. And although the deficit is expected to climb, it will increase less than expected, the CBO says.

O'Neill's testimony originally was embargoed until she delivered it this morning, but the embargo was broken Monday afternoon by other news organizations.

O'Neill will deliver several warnings to Congress. First, although baseline deficits are lower, "balancing the budget by 2002 may not be easier this year than last, largely because the time frame is shorter."

In addition, she says, the FY97 budget resolution assumed Congress would cut discretionary spending some $10 billion more than Congress actually cut. That means that even if discretionary spending were frozen at FY97 levels, outlays would be some $4 billion higher than spending caps call for and $20 billion more than the budget resolution assumed.

At a freeze level, the CBO estimates that by 2002, discretionary outlays would be worth 14 percent less than the 1997 amount. By 2007, the outlays would be worth 26 percent than they were in 1997. "Thus, achieving the discretionary savings anticipated in 1998 and future years will be tough going," O'Neill concludes.

Although O'Neill will report that the deficit will reach $188 billion in 2002 under current policies, Congress will only need to find $154 billion in savings in 2002 because of a $34 billion fiscal dividend Congress would gain from actually balancing the budget.

The fiscal dividend is smaller than last year's estimate because the CBO's baseline deficits are lower.

The testimony states that the CBO's deficit estimates are one- third lower than last year's and the agency attributes the drop to three factors: lower estimates of Medicare and Medicaid spending, welfare reform, and higher projected revenues and lower debt service costs associated with lower deficits.

The CBO estimates the nation's gross domestic product adjusted for inflation will grow at an average annual rate of 2.2 percent in 1997 and 1998, the same as it did the past two years. Inflation and interest rates will remain close to their current levels, the CBO said.

O'Neill also warned that her testimony does not reflect the poor budget effects of the retirement of the baby boom generation or continued growth in healthcare costs after 2007.

Asked Monday to assess the chances of the White House and Congress striking a budget deal this year, White House Press Secretary Michael McCurry said, "I think they're excellent." "I think there was a consensus built in the course of 1996 on the need for a balanced budget and on some of the priorities that a balanced budget would address," he said. "And I think it's certainly within the realm of the possible that the Republican Congress and a Democratic president can come to an agreement quickly and get the job done."