- The Washington Times - Tuesday, January 25, 2005

The Congressional Budget Office (CBO) yesterday issued its semi-annual report projecting federal budget deficits for the current fiscal year (2005) and the next 10 years. Following the $412 billion budget deficit for fiscal 2004, CBO forecast a 2005 deficit of $368 billion. But CBO cautioned that the 2005 figure excluded the forthcoming supplemental appropriation, which Congress must pass to finance U.S. military operations in Iraq and Afghanistan in 2005 and to fund other activities related to the global war on terror.

Indeed, within hours of CBO’s releasing its report yesterday, the White House announced that it would soon be seeking more than $80 billion in additional funding for Iraq and Afghanistan operations this year. That could increase the 2005 deficit to nearly $450 billion.

Added to the $25 billion in military-operations funding that was appropriated in August 2004 but will be spent in fiscal 2005, the 2005 cost of the war on terror will have increased to at least $105 billion. That represents a one-year increase of nearly 50 percent over 2004, when the Defense Department obligated $71 billion for the war on terror.

By any standard, a 2005 deficit of nearly $450 billion is huge. In the fourth year of an economic recovery, when the unemployment rate is consistent with what most economists consider to be full employment, such a deficit level would represent 3.7 percent of gross domestic product (GDP).

CBO also warned that its 10-year cumulative budget-deficit projection of $855 billion probably understated what will likely occur. For example, federal law requires CBO to project that discretionary appropriations will increase only by the rate of inflation. If discretionary spending were to increase by the growth rate of nominal GDP — a much more plausible assumption — then the 10-year deficit projection would increase by 200 percent, rising to more than $2.5 trillion. CBO further estimates that extending expiring tax cuts would add more than $1.8 trillion to the 10-year deficit total. Reforming the Alternative Minimum Tax would add another $500 billion over the next decade.

As bad as the discretionary-spending front could prove to be, CBO is far more worried about mandatory spending after 2015 for entitlements linked to an aging population. “Over the long term, the increasing resource demands of such programs [Social Security, Medicare and Medicaid] will exert pressure on the budget that will make current fiscal policy unsustainable,” CBO declared.

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