- The Washington Times - Tuesday, August 16, 2005

The nonpartisan Congressional Budget Office (CBO) on Monday released its latest 2006-2015 baseline budget forecast. Compared to the $365 billion deficit for 2005 projected in March, the latest forecast projects that the red ink for the current fiscal year, which ends Sept. 30, will total $331 billion. Since the record nominal surplus of $236 billion was achieved in fiscal 2000, the federal budget accounts have recorded a $128 billion surplus in 2001 and escalating deficits of $158 billion (2002), $378 billion (2003) and $412 billion (2004). The latest CBO forecast for 2005 represents an $81 billion decrease from 2004’s record nominal deficit.

Required by statute to project the future paths of federal revenues and spending under current laws and policies, CBO’s baseline budget outlook forecasts annual deficits of $314 billion (2006), $324 billion (2007), $335 billion (2008), $321 billion (2009) and $317 billion (2010). At his Monday news conference, CBO Director Douglas Holtz-Eakin revealed that these projections incorporated estimates of about $75 billion per year for U.S. operations in Iraq. As required, the projections optimistically assume that discretionary spending will increase only by the projected rate of inflation, which is less than half the rate of increase projected for nominal gross domestic product (GDP).

Worth noting is the fact that these sizeable deficit projections are expected to occur in a very favorable economic environment: Inflation-adjusted GDP growth will average 3.25 percent a year; the unemployment rate will average 5.2 percent; and short-term and long-term interest rates for Treasury securities will remain well below their 1970-2000 averages. Yet, under these CBO economic assumptions, annual deficits for 2006-2010 will still average nearly $325 billion. Even if one assumes that spending in Iraq will fall by 50 percent beginning in 2008, the average annual deficit for the five-year period would still total $300 billion.

If this trend were not sufficiently dismal, consider the fact that these annual deficit projections incorporate huge Social Security surpluses, which average $215 billion per year from 2006 through 2010. These Social Security surpluses reflect tax revenues in excess of benefit payments and intragovernmental interest payments applicable to Social Security cash surpluses that were borrowed and spent in the past. The so-called “on-budget” deficit, which excludes Social Security surpluses, averages nearly $540 billion per year (2006-2010).

All features of the 2001 and 2003 tax cuts will have expired by the end of 2010. CBO’s official baseline projections are required to reflect this. However, CBO has analyzed the effects of policy alternatives. If the 2001 and 2003 tax cuts are made permanent, and if the alternative minimum tax (AMT) is reformed consistent with the temporary AMT relief passed in 2004, then CBO’s baseline deficit projections for the 2011-2015 period would be substantively affected. According to CBO calculations, these two policy options (and the consequential increase in debt-service costs) would add more than $450 billion per year to the 2011-2015 baseline deficit projections, which average $100 billion per year. Incorporating these two policy options and removing the Social Security surplus, which averages $267 billion per year (2011-2015), would generate an average “on-budget” deficit of $825 billion per year (2011-2015), according to CBO.

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