Budget Likely to See Deeper Shade of Red

WASHINGTON â€”  Soothsayers beware. This year’s federal budget debate is about to begin by making a mockery of the forecasting business.

Just one year ago, after decades of unrelenting budget deficits, the government was predicting 10 years of dazzling surpluses totaling $5.6 trillion.

Today, the Congressional Budget Office is expected to make it official: The government has returned to the deficit-spending habit it labored so hard to kick.

It is a sobering milestone in the government’s remarkably rapid march from last year’s black ink to this year’s red, from prosperity to recession, from peace to war.

An even deeper shade of red will color the budget President Bush has prepared to send to Congress in two weeks. That will envision deficits hovering around $100 billion for this year and next, and no return to surplus until at least 2005.

The CBO is expected to project smaller deficits and a return to surplus in 2004, but only because it is measuring the budget situation as it stands now--before the inevitable spending increases Congress has in store for defense, homeland security and agriculture, just for starters.

So whatever government analysts foresee now, reality will almost certainly drag the government even deeper into deficit. Congress this year will face numerous temptations to throw fiscal restraint to the wind. It is an election year. The nation is waging a war and in the throes of recession. And in an obscure but potent change, some belt-tightening budget requirements are about to expire.

Even Mitchell E. Daniels Jr., who as Bush’s budget director is the government’s foremost tightwad, now says some things come before balancing the budget and paying down the national debt.

“There are at least three things more important,� Daniels said: increasing defense, bolstering homeland security and stimulating the economy.

Few dispute those priorities for now, but they mark a sea change for federal policymakers who for years have followed the lodestar of balancing the budget.

Bush will embrace that shift Feb. 4, when he unveils his budget for the coming fiscal year. That budget will project a deficit of about $100 billion this year and $80 billion in 2003, sources familiar with the budget say. That assumes Congress enacts his entire legislative agenda, including proposed tax cuts to stimulate the economy, which is far from certain.

Still, those are larger deficits than some in Congress had expected from Bush. And it is a far cry from the $231-billion surplus that Bush proposed a year ago for the 2002 budget year, or the $242-billion surplus that his Office of Management and Budget was projecting for 2003.

Back then, congressional analysts also were unreserved in their cheer: “The outlook for the federal budget over the next decade continues to brighten,� CBO said in its January 2001 report.

Today, when CBO Director Dan Crippen testifies before Senate and House budget committees, his message will be quite different. “What the economy gives, the economy can take away,� he said in an interview. “A good share of the surplus has disappeared.�

The bad budget forecasts spring in part from bad economic forecasts.

A year ago, the CBO predicted that the economy would grow by 2.4% in 2001. In fact, it grew by only a little more than 1% and shrank over the last six months.

Such slip-ups helped keep alive the notion that the government could continue operating in the black. As late as October, Federal Reserve officials were still warning that surpluses could eventually soak up so much federal debt there wouldn’t be enough around for the central bank to run its monetary policy. The Fed pumps money into the economy or draws it out by buying or selling Treasury bonds, the IOUs Washington issues when it’s running in the red. The central bank was so concerned that it conducted an 18-month study of what to do when the debt dwindled.

The conviction that the surpluses would continue indefinitely can also be seen in lawmakers’ policy ambitions:

* Republicans wrote Bush’s $1.35-trillion tax cut last spring assuming that it was just the beginning. A second tax cut seemed around the corner, and business groups compiled their wish lists. It never materialized.

* Democrats last year believed that a surplus-financed prescription drug benefit for Medicare was within grasp; now it seems a pipe dream.

* A year ago, both parties hoped to use the surplus to help shore up Social Security for the baby boom generation. Without a surplus, it seems almost impossible to find a painless way to bolster the retirement program for the long term.

The surplus has vanished almost before Congress got used to the idea of having one. Lawmakers had labored through the 1980s and most of the 1990s with deficits burgeoning. The dragon was slain, thanks mostly to a booming economy, when Congress wrote the 1997 balanced budget act, which plotted a course to eliminate the deficit by 2002.

But revenues poured in faster than anyone predicted, and in 1998 the government posted its first budget surplus since 1969. Then in 1999 it balanced the budget without dipping into the Social Security surplus. In 2000, it balanced the budget without using Social Security or Medicare--and politicians pledged to keep their hands off those programs for the foreseeable future.

That pledge was one of the first casualties of the Sept. 11 terrorist attacks, as the economy plunged deeper into recession and government spending spiked.

A political debate is already raging over who is to blame for the evaporation of the surplus. Democrats blame Bush’s big tax cut, which phases in over the next 10 years; Republicans say it’s because of the recession and the cost of fighting terrorism.

There is partial truth in both arguments. For the next few years, most of the change in surplus projections is attributable to increased government spending and the deterioration of the economy. But toward the end of the decade, the tax cut accounts for more of the reduction in surplus projections.

Whoever is held responsible, it is clear that both parties will face new obstacles to eliminating the deficit. For one thing, Congress will be freed of some of the budget-balancing rules that applied through the 1990s, including a soon-to-expire requirement of offsets for any new spending or tax cut to avoid adding to the budget total.

What’s more, there is now broad agreement within both parties that war and recession justify--and even require--running a deficit.

But if Congress spends too freely this year, in the name of war or the economy, it may drive up spending for years to come. “If people go hog wild this year, it’s going to take us longer to get out of deficits,� said Brenna Hapes, spokeswoman for the House Budget Committee. “When we get in deficit, it’s usually a check on spending, but that’s not the case this year.�

That’s why some lawmakers are concerned that the Bush administration is starting the bidding with a deficit as high as $100 billion. Even if Congress does not enact all the Bush policies that underlie that deficit, it may embrace its deficit target as a starting point.

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Vanishing Surplus

Actual budget surpluses through 2000 and the declining budget outlook

Note: 2001 surplus for last year’s line was estimated. The figure for today is actual.