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War spending drives record deficit estimate Original Source Link: (May no longer be active)
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War spending drives record deficit estimate
Latest figures set off new sparring between the Bush and Kerry campaigns
By BARRIE McKENNA
UPDATED AT 8:14 AM EDT Wednesday, Sep 8, 2004
WASHINGTON -- The high cost of waging war is expected to swell the U.S. budget deficit to $2.3-trillion (U.S.) over the next decade, including a record $422-billion in the current fiscal year, according to the latest Congressional Budget Office estimate.
The CBO, a non-partisan research arm of Congress, had earlier forecast a cumulative deficit of $2-trillion, including a somewhat higher $477-billion shortfall this year.
But even these latest projections may underplay the sheer magnitude of the long-term deficit quandary -- a problem highlighted by U.S. Federal Reserve Board chairman Alan Greenspan, the International Monetary Fund and scores of economists.
Unless Congress lifts the sunset clause on U.S. President George W. Bush's tax cuts, the cumulative deficit could exceed $4-trillion over the decade.
Worse still, the rapidly aging baby boom population is expected to sap the work force, while adding to the burden of costly government programs, such as Medicare and Social Security.
Some economists also pointed out that the CBO forecast may rely on overly optimistic forecasts of economic growth -- at least in the short term. For example, the agency expects the economy to grow at a rate of 4.5 per cent this year and 4.1 per cent next year.
In recent weeks, many economists have been scrambling to lower their own forecasts, and now expect less than 4-per-cent growth this year and next. That was prompted by a sharp slowdown in the second quarter, when the economy expanded at a rate of just 2.8 per cent, dragged down by surging energy prices.
David Rosenberg, chief economist at Merrill Lynch in New York, also pointed out that the CBO deficit forecast may underestimate the future cost of military and reconstruction efforts in Iraq and Afghanistan. That alone could add $115-billion to the deficit next year, which the CBO now pegs at $348-billion, he said.
Merrill Lynch is projecting significantly higher annual deficits of $450-billion in 2004 and $385-billion in 2005.
The latest figures set off a new round of sparring between Mr. Bush and Democratic presidential rival John Kerry over the health of the country's finances.
The Bush administration and many Republicans seized on the lower deficit forecast for the current year, which ends this month, as evidence that tax cuts are sparking economic growth.
"This report underscores that our policies are working to create a stronger economy, more jobs and a lower deficit," said Jim Nussle, an Iowa Republican who chairs the budget committee in the U.S. House of Representatives.
Mr. Kerry, who has repeatedly accused Mr. Bush of recklessly squandering what was once a record surplus on his watch, said there's no way to put a positive spin on the soaring deficit.
"Only George W. Bush could celebrate over a record budget deficit of $422-billion, a loss of 1.6 million jobs, and Medicare premiums that are up by a record 17 per cent," said Mr. Kerry, a Massachusetts senator, whom polls show is trailing Mr. Bush in the race for the presidency.
Even CBO director Douglas Holtz-Eakin acknowledged that the United States can't expect to grow its way out of deficits because of rising obligations under government entitlement programs.
"This is a fiscal situation in which we cannot rely on economic growth to cause deficits to disappear," Mr. Holtz-Eakin said. "Instead, the central path of the budgetary outlook will be dictated by policy choices."
The largest addition to the deficit picture since the CBO's last forecast was a massive defence spending bill passed by Congress earlier this year. That alone inflates the cumulative 10-year deficit by $500-billion.
In sheer dollar terms, this year's $422-billion deficit would rank as the largest ever. Even adjusted for inflation, this year's shortfall is higher than every deficit recorded since the Second World War.
And yet, the deficit as a percentage of gross domestic product -- 3.6 per cent -- is actually smaller than it was in the mid-1980s and early 1990s, the CBO report pointed out.
Mr. Bush has used that comparison to argue that the deficit, while serious, is hardly a cause for panic, particularly as the economy strives to recover from the recent recession.
But Mr. Kerry and the Democrats have complained that Mr. Bush's two rounds of hefty tax cuts have exacerbated the deficit, putting at risk the viability of cherished government programs in areas such as education, health and homeland security.
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