Budget Deficit Worse Than Projected

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The Bush administration expects the federal government to post a deficit of $165 billion this fiscal year, a 56 percent increase over earlier projections due in part to a surprise downturn in tax revenue caused by the stock market sell-off, officials said.

While the White House will revise upward its 2002 economic growth forecast to 2.5 percent from 0.7 percent and project a return to surpluses in fiscal 2005, rising deficits in the near term could hurt President Bush and his fellow Republicans in upcoming elections, where small swings could shift control of both the House of Representatives and Senate.

"The president deals with the cards that were dealt him," White House spokesman Ari Fleischer said, citing the recession and costs associated with the war on terrorism as justification for plunging the federal government into deficits for the first time in five years.

The return of red ink — the first since 1997 — is abrupt but not a surprise. Analysts have been forecasting renewed deficits for many months, prompted by the fragile economy, the swoon of the financial markets, and the costs of last year's tax cut and the government's response to the Sept. 11 terrorist attacks.

The new numbers, to be released Friday, were described by officials on condition of anonymity. They represented a turnaround from the $127 billion surplus in fiscal 2001, which ended last Sept. 30.

The projections were being revealed four months before elections for control of Congress and were certain to intensify this year's political battle over the economy and the budget.

White House officials and GOP lawmakers were sure to cite the deterioration as justifying a need to clamp down on federal spending. And they were blaming the revived red ink on factors beyond President Bush's control.

"The president is the first to acknowledge that when nations have emergencies, when nations have wars and when nations have recessions, a deficit is an appropriate way for the country to fight the war and fight the recession," said Fleischer.

"The president deals with the cards that were dealt him," he added.

But Democrats said the budget's long-term prospects were worse than Mr. Bush was admitting. They blamed the $1.35 trillion, 10-year tax cut that he pushed through Congress last year and the long-range impact of spending boosts for defense and domestic security sought by both the White House and lawmakers.

"Our problem is having admitted a problem for this year, they quickly revert to fiscal denial for next year," said Rep. John Spratt of South Carolina, top Democrat on the House Budget Committee. "They're right back into blue-sky forecasting for next year."

Democrats were also arguing that as a result, the government will have to dip into Social Security surpluses to pay for other programs. That is something both parties have pledged to avoid in a bid to attract support from older voters, even though using those surpluses has no effect on Social Security's solvency or benefits.

Democrats, however, were not the only ones expecting a worsening budget picture next year. The Senate Budget Committee's Republican staff projected recently that the 2003 deficit would be $194 billion.

Illustrating the rapid decline of the government's fiscal fortunes, Mr. Bush projected in February that this year's deficit would be $106 billion. That assumed that the new tax cuts and other policies he proposed in his new budget were enacted.

Last month, Director Dan Crippen of the nonpartisan Congressional Budget Office said this year's deficit could approach $150 billion.

CBO estimated this week that through the first nine months of this fiscal year, there was a cumulative $122 billion deficit. For the same period of fiscal 2001, the government ran a surplus of $169 billion.

Federal revenues have been falling below expectations in recent months, both because of last year's tax cut and the slowed economy. In particular, analysts have noticed falloffs of taxes collected on capital gains and nonwithheld income like executive bonuses and stock options — which are reliant on healthy financial markets and performance by corporations.