Bush budget plan likely underestimates U.S. deficit

WASHINGTON Mon Feb 4, 2008 3:19pm EST

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WASHINGTON (Reuters) - U.S. budget deficits in the next few years will likely exceed the near-record gaps forecast in the White House budget proposal issued on Monday, which assumes much stronger economic growth than most economists expect and excludes crucial Iraq war funding and tax changes.

Economists say the White House forecast of 2.7 percent economic growth in 2008, which was released in November but which underlies the deficit projections, is too rosy given deteriorating conditions since then -- meaning near-term tax revenues are likely to disappoint as well.

"The odds are that the economy will grow less than the administration projects in 2008 and 2009, and that the deficits will be significantly larger than they project for a number of years," said Douglas Elmendorf, an economist at the Brookings Institution in Washington.

The nonpartisan Congressional Budget Office estimates growth this year at a paltry 1.7 percent, while the Blue Chip survey of private economists in January showed a consensus of 2.2 percent growth -- a projection likely to be marked down when the next survey is released on February 10.

President George W. Bush's final budget blueprint sees the deficit more than doubling in the current fiscal year to $410 billion, due partly to an expected $125 billion cost for fiscal stimulus measures aimed at keeping the economy from falling into recession.

The White House, which assumes passage of the president's budget proposals, sees the deficit holding at around that level -- $407 billion -- in fiscal 2009, but then shrinking markedly in subsequent years, reaching a $48 billion surplus in 2012.

Deficits had fallen steadily in the past three years after hitting a record $413 billion in fiscal 2004.

WAR SPENDING UNCLEAR

But Bush's fiscal 2009 budget only includes $70 billion in spending for wars in Iraq and Afghanistan, and doesn't include any funding beyond that. Due to the "fluid situation on the ground in Iraq," White House budget director Jim Nussle said the administration needs to wait for a new progress report from the U.S. commander in Iraq before determining funding levels.

"I think the main deceptions in the budget are the same ones we've seen for five years. The costs for Iraq and Afghanistan has consistently been $200 billion a year, but they've only put aside $70 billion," said Chris Edwards, economist at the libertarian Cato Institute. "The war will cost $100 (billion) to $150 billion a year until 2012 or so."

Coupled with unrealistic growth forecasts, the additional war costs mean the fiscal 2008 deficit will likely top $500 billion, he said.

In addition, proposed savings of $34 billion from health care programs and discretionary domestic spending will be nearly impossible to achieve from a Democrat-controlled Congress during an election year.

Senior Democrats pronounced the cuts dead on arrival, but the budget plan also drew some criticism from Republicans for failing to disclose full war costs and heaping more debt on future generations.

"This budget must have been viewed by them more as an academic exercise than a serious exercise because it's not a serious budget," Sen. Judd Gregg of New Hampshire, the top Republican on the Senate Budget Committee, told Reuters.

"There are even more games than usual," he said.

AMT TO BOOST RECEIPTS

The plan assumes that Bush's tax cuts enacted in 2001 and 2003 are made permanent, instead of expiring at the end of 2010.

However, it only a includes a one-year "patch" to keep the alternative minimum tax from ensnaring millions of additional middle-class taxpayers. Analysts said that -- coupled with the lack of war costs -- was a main reason why revenues and deficits looked to improve in fiscal 2010 and beyond.

Revenues lost from extending tax cuts would largely be offset by more revenues from the AMT, which was enacted in 1969 to ensure that the then super-rich paid at least some tax.

Much of what happens beyond this year will depend on the November election, but some see the budget proposal as a final expression of Bush's spending priorities. "He's teed up a policy document for a potential President (John) McCain," said Cato's Edwards, referring to the leading Republican candidate.

Still, some economists remain optimistic that the increase in the deficits will be a temporary phenomenon and may come in even smaller than forecast as economic stimulus measures and interest rates cuts spur the economy back to life.

"We're pretty sanguine that the government will be able to resume this trend of improving the deficit in the out-years," said Kim Rupert, head of fixed income analysis at Action Economics LLC in San Francisco. "They have overestimated the deficit by about $100 billion every year since fiscal 2005."

(Reporting by David Lawder; Editing by Neil Stempleman)

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