Tough task for Bush over pledge on deficit

Republicans say forecasts back their vision while Democrats warn of long-term economic damage

Author: Christopher Swann

Published: September 8, 2004

President George W. Bush will have to take radical steps if he is to meet his pledge to halve the ballooning US budget deficit within five years, forecasts published yesterday suggest.

According to the non-partisan Congressional Budget Office, the deficit is on track to fall from this year's 3.6 per cent of national income - a record Dollars 422bn - to 2.1 per cent of gross domestic product in five years' time. The CBO's estimate of the cumulative deficit in the decade to 2014 will be Dollars 2,294bn.

This five-year outlook assumes no real rises in discretionary spending over the next decade and could be far worse if the president's tax cuts of 2001 and 2003 are extended, as Mr Bush has pledged to do. Failure to reduce the deficit could lead to higher interest rates in the long term and a decline in the dollar, some economists warn.

Republicans pointed to the prospect for a declining budget deficit. "This report underscores that our policies are working to create a stronger economy, more jobs and a lower deficit," said Jim Nussle, Republican chairman of the House Budget Committee.

But Democrats seized on the figures as further evidence of the profligacy of the Bush administration, saying that the deteriorating fiscal outlook would mean higher mortgage payments for home owners and a bigger tax burden on the next generation.

"Only George W. Bush could celebrate over a record budget deficit of Dollars 422bn, a loss of 1.6m jobs, and Medicare premiums that are up by a record 17 per cent," John Kerry, the Democratic presidential candidate, said. Mr Kerry added that his own plan would seek to restore fiscal discipline and rein in spending, cutting the deficit in half in four years.

Tax experts said that to meet his target of halving the deficit Mr Bush would need to abandon his tax cuts or impose painful cuts in government spending.

Chris Edwards, director of tax policy at the Cato Institute, a Washington think-tank, estimated that discretionary spending would have to be slashed by up to 16 per cent or Dollars 175bn. The Urban Institute, another think-tank, said that, even excluding expenditure in Iraq and Afghanistan, the government would need to cut spending by 6 per cent or Dollars 65bn.

Since Mr Bush came to power, discretionary spending has risen by an average of more than 9 per cent a year. Alice Rivlin, a former chief of the White House's Office of Management and Budget and of the CBO, said the figures were likely to turn out worse than the baseline forecasts released yesterday.

"Even if you assume that spending in Iraq and Afghanistan tails off, it is safe to forecast that many of the Bush tax cuts will not expire and that discretionary spending will rise by more than inflation. Under this scenario, the deficit does not really go down at all in dollar terms and even rises slightly by 2009."

The CBO figures marked a modest change on its previous forecasts in March, when it predicted a shortfall of Dollars 2,012bn in the decade to 2014. The deficit in 2004 is expected to be slightly less, at Dollars 422bn compared with a prediction of Dollars 477bn in March. But after 2005 the deficits are larger than the March forecasts.

As the presidential campaign enters its final stage, both sides have tried to portray the other as fiscally irresponsible. At the Republican convention last week, Mr Bush painted Mr Kerry as an old-style tax-and-spend Democrat.

Robert Rubin, Bill Clinton's Treasury secretary, said "horrendous projected long-term deficits" posed a threat to the long-term health of the US economy.