IN THE NEWS

CBO: US FY2006 Budget Deficit To Hit $337 Bln

January 26, 2005

By Dow Jones

WASHINGTON (Dow Jones)--Under current policies, the U.S. government will amass a $337 billion annual budget deficit in fiscal year 2006, according to Congressional Budget Office estimates released Thursday.

The cost of cleanup and recovery from Hurricane Katrina drove that estimate up $23 billion from the $314 billion deficit estimate CBO made in August.

The estimate would be higher still - closer to $370 billion - if the likely additional costs of Hurricane Katrina, the war in Iraq and tax cuts are factored in, CBO said.

Republicans said the report is proof they need to continue efforts to cut federal spending. Democrats said it shows President George W. Bush's tax policies have failed.

Both sides agree, however, the estimate is probably more optimistic than it should be.
CBO's estimates are constrained to reflect federal law as it stands, not as it is likely to be.
"This is a current law projection, not a forecast," acting CBO director Donald Marron said at a briefing for reporters Thursday morning.

Under those constraints, CBO predicts the budget outlook will quickly improve. In August, CBO predicted deficits from 2007 through 2011 would total $1.5 trillion. But that estimate narrowed on Thursday to $1.1 trillion.

Even under those assumptions, the government's anticipated good fortunes are expected to turn when workers from the "baby boom" generation begin to retire, putting strains on both Social Security and Medicare, Marron said.

"While today's news underscores the strength and resilience of our economy, it also reminds us that controlling the budget is a long-term, step-by-step commitment," said House Budget Committee Chairman Jim Nussle, R-Iowa.

Senate Budget Committee Chairman Judd Gregg, R-N.H., said the report shows that "it is critical that we continue to hold the line on spending to put our fiscal house back in order."
Rep. John Spratt, D-S.C., said that the CBO's estimates show "we will not just grow out of these deficits, (but) far from resolving the problem, the Bush Administration policies make the deficit worse."

Last year Congress approved a plan to cut entitlement programs by roughly $40 billion over the next five years, while extending tax cuts at a cost of $70 billion over the same time period.
The annual budget deficit hit a nominal dollar high of $412 billion in 2004 and narrowed to roughly $318 billion in 2005.

CBO estimated in August that deficits would hover at $320 billion to $330 billion through 2010, when tax cuts enacted in President George W. Bush's first term are set to expire.
On Thursday, CBO said that a change in certain economic variables meant it now thinks that if the government continues on its current tax and spending path, annual deficits will lessen steadily to $220 billion by 2010.

CBO said that its underlying assumptions about economic growth are largely unchanged, but that revisions to the National Income Product Accounts have changed enough to cut projected deficits by about $100 billion annually in the mid-term.

CBO assumes that real gross domestic product will grow at a rate of 3.6% in 2006 and 3.4% in 2007. In August, CBO predicted GDP would grow at a rate of 3.4% in 2006. Relatively unchanged is CBO's estimate for annual average real GDP growth over the next five years. In August, CBO said that rate would be 3.2%, but said Thursday it would be 3.1%.

The estimates do not include the cost of the ongoing war in Iraq beyond the $50 billion appropriated for fiscal year 2006. Nor does it include the cost of paying flood insurance claims related to Hurricane Katrina.

CBO said that if those costs were included in its estimate, the fiscal year 2006 deficit would be closer to $360 billion and closer to $370 billion if Congress succeeds in extending the life of certain expiring tax cuts.

The White House's Office of Management and Budget said that when Bush releases his budget in February, it will project a deficit of more than $400 billion for fiscal year 2006.
"The OMB estimate will be higher primarily because of additional funding for the War and for recovery and rebuilding needs in response to Hurricane Katrina, as well as the estimated costs associated with the one-year extension of relief from the Alternative Minimum Tax," said OMB official Alex Conant.

CBO's estimates are admittedly imprecise, but better than, or at least as good as, any others available. And because they are provided by a non-partisan government entity, they provide the benchmark by which lawmakers will measure future budget efforts.

Democrats: CBO Estimates Show Red Ink

Rep. Spratt, the highest ranking Democrat on the House Budget Committee, said that when the CBO estimates are adjusted "to reflect the Bush Administration's stated agenda, the deficit in 2011 is far worse and remains substantial throughout the 10-year projection."

If the estimates are adjusted to reflect the continuing cost of the war in Iraq and the cost of extending tax cuts enacted under Bush's first term, the annual deficit outlook takes a substantial turn for the worse, according to CBO.

Under those assumptions, annual deficits are expected to remain above $300 billion for the next five years, dip briefly below $300 billion in 2012, before rising sharply to $400 billion by 2016.

House Minority Whip Steny Hoyer, D-Md., said the report shows that "Washington Republicans have driven our nation right back into the fiscal ditch." Hoyer said that those policies "threaten to drag down our economy for years to come and immorally force our children and grandchildren to pay this generation's bills."

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