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Can we grow out of deficits this big?

Bush's budget goes $521 billion into the red. Behind that number is a long-term fiscal challenge for the US economy.

By Staff writer of The Christian Science Monitor / February 3, 2004



WASHINGTON

An 11-pound federal budget arrived with a thud on Washington desks Monday morning, underscoring an increasingly tough fiscal environment.

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Rising projections for the 2004 and 2005 federal deficits have apparently placed constraints on the Bush administration's policymaking options, and prompted a scaling back of programs on many domestic fronts.

The new numbers are already sharpening the debate about military spending versus domestic needs, the amount of economic damage done by budget deficits, and the realism of the president's plans to trim the deficit by half by 2009.

Beyond those questions looms a longer-term worry: Even if President Bush makes good on his deficit-cutting pledge, experts say it won't ease the burden of rising deficits as baby boomers retire.

"Our fiscal gap is too great to grow our way out of this problem. Tough choices are going to be required," says David Walker, the Comptroller General and head of Congress's nonpartisan General Accounting Office (GAO).

At a Monitor breakfast he outlined stark choices: Reform entitlement programs like Social Security. Cut the base of discretionary spending which Congress controls. Change tax policies. "We are going to have to look at all three," he said.

The entitlement challenge appears sure to color near-term policymaking, such as whether the president can win approval for making his tax cuts permanent. Already, Democrats are stepping up efforts to tag Bush as fiscally irresponsible.

But economists also generally agree that in the short run, more spending gives the economy a boost. The president highlighted this point, saying his budget was "a reflection of this nation's goals and purposes and advances our three highest priorities," including winning the war on terror, strengthening homeland defenses, and supporting the economic recovery.

There is no dispute that federal finances currently are awash in red ink. There will be a $521 billion gap this year between federal spending and government income. In the 2005 government budget year that starts this October, the deficit will be a still lofty $364 billion. While records in dollar terms, the deficits are smaller as a share of the economy than some deficits in the past

At the heart of the president's proposals is another boost in spending on national security. Security related spending increases would consume virtually all of the 3.9 percent increase requested in spending controlled by Congress.

Some $420.7 billion in military spending does not include ongoing military operations in Iraq and Afghanistan, to be funded in a request expected to come after November's election.

With his conservative GOP allies unhappy about red ink spilling across federal account books, the president is proposing a clampdown on domestic spending. The new budget calls for cuts in seven of 16 cabinet level agencies and seeks to hold nonsecurity related discretionary federal spending to a tiny 0.5 percent increase. That does not keep pace with inflation or a rising population - in effect a cut.

In the short run, deficits are an economic plus, pumping up business activity as the election nears. Economist disagree on whether Bush economic policies have been the most efficient way to boost growth. But most agree that higher government outlays bolster the economy. The Bush budget documents project healthy economic growth of 4.4 percent this year and a less robust 3.6 percent in 2005.

But longer run, experts say having the government tap the credit markets for half a trillion dollars inevitably pushes interest rates above what they would otherwise be and crowds out some private investment. A bigger debt load leaves the country "more vulnerable to shocks with much less ability to finance new challenges," including predictable ones like the retirement of baby boomers, says economist Brian Nottage writing in "The Dismal Scientist."

The president's budget contains a pledge to cut the deficit in half by 2009 by embracing pro-growth policies and proposes new caps on federal spending, although not on tax cuts. The president proposes to make permanent his 2001 and 2003 tax cuts which carry a 10-year cost of over $1.7 trillion.

The president's team says it can trim the deficit from 4.5 percent of gross domestic product this year to 1.5 percent in 2009.

A document prepared by the House Appropriations Committee for a weekend GOP retreat said, "solely targeting non-defense discretionary spending will not have a significant impact on the deficit."

Gene Sperling, economic adviser to President Clinton, says the White House has engaged in "reverse generational responsibility" by running up debts at a time when the nation should be setting aside money to help pay for baby boomers' retirement.

The Bush budget admits that the fiscal outlook is "less encouraging" after the next five years as baby boomers start retiring in 2008. Goldman Sachs economist Ed McKelvey says spending on health and retirement entitlements is estimated to rise from 9 percent of GDP in fiscal year 2010 to almost 18 percent in 2050.

Wire material was used in this story.

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