Thu, Jan 27, 2005 page1

• US budget deficit pushes toward a record US$427bn

  DEEP RED Military costs in Afghanistan and Iraq are driving the deficit to a point that is unnerving economists, but the White House says it 'has a plan'

  • AFP
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  The US budget deficit is likely to hit a record US$427 billion in fiscal 2005, going deeper into the red as a result of a special funding request for Iraq and the war on terrorism, new estimates showed on Tuesday.

  Senior Bush administration officials disclosed the latest deficit estimate as they outlined their special US$80-billion request for operations in Iraq, Afghanistan and elsewhere as part of the global war on terror.

  If accurate, the deficit would eclipse the US$412-billion deficit in the 2004 fiscal year. But as a percentage of GDP the deficit would be 3.5 percent, down slightly from 3.6 percent in fiscal 2004 and well below deficit levels of the 1980s.

  The estimated shortfall for the fiscal year to Sept. 30 came the same day the Congressional Budget Office (CBO) projected a deficit of US$368 billion.

  But the CBO noted that the law governing its projections requires its estimates to be based solely on spending and revenue measures already on the books.

  Under these baseline estimates, the deficit would ease to US$295 billion in fiscal 2006 and US$261 billion in fiscal 2007.

  The nonpartisan CBO said however that its estimates "omit a significant amount of spending that will occur this year -- and conceivably for some time in the future -- for US military operations in Iraq and Afghanistan and for other efforts in the war on terrorism."

  The CBO's long-range outlook, which goes through fiscal 2015, projects the US government will remain in the red until fiscal 2012.

  The cumulative deficits would be US$1.188 trillion in the 2006-2010 period and US$855 billion in the 2006-2015 period, the CBO estimated.

  The long-range outlook, meanwhile, is based on the expiration of existing tax cuts engineered by President George W. Bush.

  It also makes no provision for Bush's plan to overhaul the social-security retirement system with private accounts.

  CBO Director Douglas Holtz-Eakin said the projections assume a strengthening economy, but that the deficits are likely to persist because of the growth in social security retirement and medical costs in the Medicare and Medicaid programs.

  "It's important to remember that even though the economy may outperform even CBO's forecasts, we are unlikely to grow our way out of the long-term budget issues," he said. "That is because even with discretionary spending restraint, we have to keep our eye on the ball and recognize that it is the long-term growth in mandatory spending, particularly in Medicare and Medicaid, which are our greatest fiscal pressures."

  John Lonksi, economist at Moody's Investors Service, said the deficit estimate had little immediate impact on financial markets because, "It's nearly impossible to predict with any accuracy what the budget deficit's going to look like 10 years from now."

  Asked about the projected return to surplus in 2012, Lonksi said, "I wouldn't count on it," adding that this would mean "drastic measures" including unpopular spending cuts.

  The White House meanwhile said it remains committed to halving the budget deficit by 2009.

  "The president has a plan to cut the deficit in half over the next five years, and we're on track to meet that goal," White House spokesman Scott McClellan said.

  But the Concord Coalition, a think tank dedicated to sound budget finances, said the latest projections were troublesome.

  The forecasts "show a worsening budget outlook and the first ominous signs of fiscal strain brought on by the baby boomers' retirement," it said.

  "No one should be lulled into thinking that this is a good news report," Concord Coalition executive director Robert Bixby said. "To the contrary, it is further confirmation that fiscal policy is on a dangerous path. Even with a strong economy, annual deficits are likely to hover between US$400 billion and US$500 billion for the next five years. After that, the combination of tax-cut extensions and growing entitlement costs threatens an upward spiral of deficits and debt that cannot be sustained."
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