[PEN-L:33703] deficits forever

["Ian Murray" <seamus2001@xxxxxxxxx>]

washingtonpost.com
Deficit Predictions Soar With Bush Plan
Economists Say Records Could Fall

By Jonathan Weisman
Washington Post Staff Writer
Friday, January 10, 2003; Page A01


President Bush's 10-year, $674 billion economic growth package --
coupled with a war with Iraq -- would push the federal budget deficit
well into record territory next year, and possibly as high as $350
billion, private-sector budget forecasters said yesterday.

Measured against the size of the economy, a $350 billion deficit would
still be smaller than the deficits of the late 1980s and early 1990s.
But in sheer dollar terms, it would easily eclipse the $290 billion
record set in 1992, the last year of George H.W. Bush's administration.
It also represents a steep fall from the record $236 billion surplus of
2000.

Moreover, the deficit's rapid rise is coming just a few years before the
aging baby-boom generation begins to make itself felt on federal
spending, said David Wyss, chief economist at Standard & Poor's DRI.

"I don't think it's a near-term concern," Wyss said. "But people are
starting to think about it as a real long-term issue."

"The collision course is pretty easy to see," agreed Diane Swonk, chief
economist at Bank One Corp. in Chicago.

The impact on the long-term budget picture is likely to be the central
issue in the coming debate in Congress over the president's ambitious
economic package, which was unveiled in Chicago on Tuesday.

"Tax cuts are not free," said Sen. John Breaux (D-La.), a key Bush ally
in the battle over his 2001 tax cut.

That year, when Bush proposed a 10-year, $1.6 trillion tax cut,
lawmakers believed those funds would be easily covered by the $5.6
trillion budget surplus that forecasters were anticipating through the
end of this decade.

But those rosy predictions have evaporated. This time, the president's
proposal is being offered in the teeth of rising deficits.

Democrats -- and a handful of Republicans -- argue that any economic
stimulus package should be a one-time cash injection into the economy
that does not have a long-term impact on the federal budget deficit.

But Bush has said that sustained economic growth will take fundamental
changes in the tax system and a package large enough to get the notice
of a $10.5 trillion economy.

"The mule needs a kick, not a love tap," said Trent Duffy, a spokesman
for the White House Office of Management and Budget.

Indeed, the centerpiece of the Bush plan -- a provision to exempt
dividends from "double taxation," first at the corporate level, then at
the individual level -- could prompt dramatic changes in corporate
finance and governance.

But those changes, while relatively inexpensive upfront, will have
significant long-term costs to the Treasury. Bush said yesterday that
his plan would actually inject $59 billion in cash into the economy this
year, considerably less than the $102 billion initially stated this
week. That larger figure includes money that taxpayers will see in the
form of rebate checks after they do their taxes next year, said White
House spokeswoman Claire Buchan. But the plan grows considerably in
2004.

"There's no question that the growth plan will have an impact on the
deficit," Duffy said, "but we have other deficits, a deficit of jobs, a
deficit of paychecks. The president is very concerned about the deficit,
but we need to put in place long-term growth to get the revenues back in
place."

Assuming a relatively quick and inexpensive war and full implementation
of the Bush tax cut, Wyss said the deficit should reach $275 billion in
2003, compared with the $109 billion deficit projected by the White
House in August. By 2004, that number would reach $350 billion.

Those numbers are identical to estimates released yesterday by Morgan
Stanley Dean Witter chief economist Richard Berner. Bank One and
Economy.com, an economic research firm in Pennsylvania, have developed
deficit forecasts that are slightly lower but still more than $300
billion. Merrill Lynch economists met with congressional forecasters
yesterday to present a range of numbers that were roughly in line with
the other Wall Street projections, a congressional aide said.

The Congressional Budget Office and the White House hope to release
their own forecasts late this month and in early February. Both
predicted in August that the deficit would fall in both 2003 and 2004,
to as little as $48 billion. But an administration official said the
deficit in 2003 would grow larger than the $157 billion mark posted in
2002.

On Wall Street, the mood of forecasters has been bleaker for some time.
Wyss called his projections "very conservative" because they use an
"everything goes right" war. He also said he believes the White House
has understated its dividend tax proposal by as much as 50 percent,
because administration forecasters have not sufficiently accounted for
the cost of one obscure provision that effectively grants a capital
gains tax cut when investors sell stock in companies that elect not to
pay dividends.

Treasury officials said their estimates are accurate.

Mark Zandi, Economy.com's chief economist, said the president's proposal
to end taxation on corporate dividends, coupled with tax cuts already
enacted, would "significantly overwhelm the fiscal situation" within six
years.

"The next president will have some very difficult decisions to make,"
Zandi said. "We're heading in the wrong direction."

Many economists say the swelling deficit should have little negative
impact on economic growth this year or next. Federal budget deficits do
tend to raise long-term interest rates, making it more expensive for
businesses to borrow and invest, Berner said. But, he added, as long as
economic growth is slow, the private sector's demand for investment
dollars will stay low. Only when the economy significantly heats up
would the competition between the federal government and private
companies for lenders significantly boost interest rates.

Bush administration economists say the economic growth that could create
that competition would also lead to a surge in tax dollars that will
bring the federal budget back into balance.

That view does not take into account the demands that baby boomers will
place on the Social Security and Medicare systems, private forecasters
say.

"We're looking at deficits forever," Wyss said.