Massive Federal Deficits Feared

A liberal advocacy group and an investment bank are projecting federal deficits over the next decade exceeding a staggering $4 trillion.

In a study to be released on Wednesday, the Center on Budget and Policy Priorities estimates that the cumulative shortfall through 2013 will be $4.1 trillion. That assumes Congress will enact a new prescription drug benefit, extend a series of recently enacted tax cuts that would otherwise expire, and approve other tax reductions and spending increases that many believe are inevitable.

During that period, annual deficits would never dip below $325 billion and would hit $530 billion in 2013, the liberal center said. The highest deficit ever was $290 billion in 1992.

"Acting now to reduce future deficits will make the burden imposed on future generations noticeably smaller than if we wait five, ten or more years to act," wrote Richard Kogan, author of the center's study.

Two weeks ago, the investment banking firm Goldman Sachs used many of the same assumptions to project deficits over the same period totaling $4.5 trillion. Its forecast — which it also attributes to the weak economy and the likelihood of election-year spending increases next year — includes projected deficits of $425 billion this year and $450 billion in 2004.

Conservatives and another Wall Street firm said such estimates are unreliable and probably overstated.

In its most recent forecast, the Bush administration estimated in February that deficits would total $1 trillion over the next five years, assuming that the president's tax and spending proposals become law.

It did not issue a 10-year projection, saying such forecasts are unreliable, and is likely to issue an updated five-year estimate later this month that analysts expect to be worse than February's.

Joined by conservatives, the administration argues that slight, unpredictable changes in the health of the country's economy can have massive long-term effects on federal revenue, spending and the budget's bottom line.

"Ten-year projections are like trying to forecast the weather 10 years out," said Brian Riedl, a budget analyst with the conservative Heritage Foundation.

Echoing that view was a newsletter last week from the investment bank J.P. Morgan, which said many budget forecasts are far too gloomy.

"Doomsday United States budget scenarios are based on pessimistic growth assumptions about the economy and future federal revenue," the newsletter said.

Underlining the uncertainty of such long-range forecasts, they come 2-1/2 years after government analysts envisioned 10-year surpluses totaling a record $5.6 trillion. Thanks to a recession, higher spending and deep tax cuts that President Bush moved through Congress, that figure has vanished in a dizzyingly fast and steep decline such as the federal budget has never before seen.

The predicted shortfalls also come as Congress, on vacation until next week, moves with Mr. Bush toward enacting new prescription drug benefits that lawmakers say should cost $400 billion over the coming 10 years.

Legislators are also working on new tax cuts and are expected to increase spending for defense, education, domestic security and other programs later this year.

Some assumptions from the liberal budget center's study include:

• Political pressure will mean that cuts in income and other taxes, enacted over the last three years, will not expire at various times over the next decade, as now scheduled. 10-year cost: $1.7 trillion. Many of the tax reductions included in this year's tax cut bill were made temporary to reduce the overall cost of the bill, but Republicans in Congress have strongly hinted that their intention is to make the cuts permanent.
• Congress will fix the alternative minimum tax, originally designed to ensure that the richest Americans pay at least some taxes, to prevent millions of Americans from having to pay it. Cost: $760 billion.
• Lawmakers will enact a prescription drug benefit and provide more than inflation increases for defense, rebuilding Iraq, domestic security and other programs. Cost: up to $1.9 billion.

They have accused Bush of fostering fiscal policies that are threatening the solvency of Social Security, Medicare and other programs — just as the huge baby boom generation prepares to retire. The federal Treasury already owes Social Security trust fund billions of dollars; by taking on new debt, the government may reduce its ability to repay what it owes the retirees' fund.

The president has advocated a greater role for the private sector in both Social Security and Medicare; severe deficits could force the government to adopt that approach.

Higher deficits also increase the amount of the federal budget spent to pay interest on the debt. Some conservatives believe large deficits actually constrain federal spending by preventing borrowing in later years.

But many economists feel higher deficits soak up money that could otherwise be used for private investment needed for economic growth.

As the budget picture has deteriorated, Bush administration officials have said their chief concerns are righting the economy and fighting terrorism. Tax cuts will strengthen the economy, producing more federal revenue that will help eventually balance the budget, they say.

In March, the nonpartisan Congressional Budget Office projected a $1.8 trillion deficit through 2013. But that excluded the 10-year, $350 billion tax cut and state aid package enacted in May and any other budgetary changes that have not yet become law.

Last month, the congressional budget agency worsened its estimate of this year's deficit to exceed $400 billion. It will not update its 10-year forecast until August.