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