Bush budget plan likely underestimates U.S. deficit

By David Lawder - Analysis

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.