- The Washington Times - Wednesday, September 8, 2004

Even though the Congressional Budget Office’s (CBO) September baseline forecast reduced its projection of the 2004 federal budget deficit by more than $50 billion, it offered little hope that substantive progress would be achieved on the fiscal front any time soon. Indeed, while the estimate of the 2004 deficit fell from the March forecast of $477 billion to $422 billion, the cumulative 10-year projection of future budget deficits (2005-2014) increased from $2 trillion in March to $2.3 trillion this week.

Setting yet another record in absolute terms, the projected 2004 deficit of $422 billion would reflect a $47 billion increase over the previous record set last year. In relative terms, however, the deficit would total 3.7 percent of gross domestic product (GDP). As the White House and congressional Republicans stress, 3.7 percent of GDP is significantly below the record deficit level of 6 percent of GDP that occurred in 1983. But a couple of caveats are in order. First, fiscal 1983 began at the bottom of the 1981-82 recession, the steepest downturn in post-World War II history, while fiscal 2004 began nearly two years into an economic recovery. Second, the 1983 unified budget deficit did not benefit from a countervailing off-budget Social Security surplus. By contrast, without the benefit of a $149 billion Social Security surplus this year, the 2004 deficit would total $571 billion, or 5 percent of GDP.

Over the longer term, CBO’s latest baseline forecast reveals that the cumulative 10-year (2005-2014) budget deficit of $2.3 trillion would be more than twice as large ($4.7 trillion) if nearly $2.4 trillion in cumulative Social Security surpluses were not included. Indeed, the average on-budget deficit, which excludes the Social Security surplus, would exceed $520 billion per year over the next five years, according to CBO’s forecast.

By law, CBO’s baseline forecast must assume that current laws and policies remain unchanged. The net effect of this requirement is to provide projected deficits that are much lower than the deficits that would likely result if recommended policies were enacted into law. Extending the 2001 and 2003 tax cuts, for example, would add $1.5 trillion, including debt-service costs, to the 10-year deficit forecast. CBO’s analysis does not consider the massive spending increases endorsed by John Kerry, but it is fair to say that their impact on the deficit would probably be even greater. In addition, reforming the Alternative Minimum Tax, which both presidential candidates endorse, could add between $425 billion and $600 billion to the 10-year deficit totals. Yet, even these numbers pale compared to the likely impact of runaway entitlement spending over the long term.

Dominating the federal-budget outlook today are both short-term and long-term structural deficits, which almost certainly will require the attention sooner rather than later of both Congress and whoever is elected president.

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