Ripple effects of rising fiscal woes in Washington

Budget impasses and growing deficit raise concern about long-term economic growth and retiree benefits.

When members of Congress headed for the hustings Monday, they left behind what many consider a growing fiscal mess.

It's not unusual for Congress in an election year to duck politically sensitive budget decisions. But the combination of several budget impasses, plus the passage of two tax measures enlarging a deficit already at a record level in dollar terms, raises the eyebrows of many budget watchers.

"Congress and the president keep digging the hole deeper," says Robert Greenstein, executive director of the Center on Budget and Policy Priorities (CBPP).

He and others point to the corporate tax bill passed by the Senate Monday and now on its way to President Bush's for signing. The measure, the biggest overhaul of the corporate tax code in 20 years, does close some tax loopholes and contain other measures that will bring in more revenue.

But critics say the extent of the corporate "giveaways" in the bill far exceed the additional money that will be taken in and thus, over time, will substantially add to the deficit. At the same time, last week Mr. Bush signed a bill extending "middle-class" tax cuts that Congress had passed earlier. Analysts estimate that will add $146 billion to the deficit over 10 years, though supporters say it will help create jobs and eventually bring in more revenue.

In the next 10 fiscal years, the deficit will add up to $5.5 trillion, unless Washington takes steps to reduce it, says John Irons, an economist at OMBWatch, a Washington think tank. Further, Washington took a "triple dive" on the fiscal 2005 budget, says veteran analyst Stan Collender:

• Congress did not pass a budget resolution this year.

• Only four of 13 appropriations bills have been passed so far. The remaining ones will probably will be dealt with when Congress returns after the election for a "lame-duck" session. This isn't unusual. Congress has only once in the past 27 years passed all appropriations bills for the next fiscal year, as it is supposed to, before the Sept. 30 deadline.

• Washington is about to bump up against the $7.384 trillion federal debt ceiling. It won't be able to borrow any more money from the public to cover its deficit, projected at $348 billion in this fiscal year by the Congressional Budget Office.

To avert a shutdown of some government functions, the Treasury is expected to borrow money from the pension funds of federal workers until the November lame-duck session of Congress. The Republican-led body may be less embarrassed then by the usual criticism about expanding federal debts. It will probably pass a bill raising the ceiling. Then the Treasury would return the borrowed money to the pension funds with interest.

Most of today's budget hassle has little immediate impact on the US public. "There will be no financial collapse," says Martin Sullivan, an economist with Tax Analysts in Arlington, Va. But he adds: "Every dollar of deficit is bad. It reduces capital formation, thereby damaging long-term economic growth."

One issue that troubles budget watchers on both sides of the political spectrum is the growing tendency of Congress to use budget "gimmicks" to avoid limits on spending or tax cuts. Some analysts say the creative accounting has dramatically contributed to the increase in the number of pork-barrel projects - from 2,000 in 1995 to as many as 10,000 this year. Federal spending is "out of control," says Brian Riedl, an economist at the conservative Heritage Foundation.

Critics cite thecorporate tax bill in particular as laden with gimmicks. They see it as partly the product of a "feeding frenzy" by company and industry lobbyists seeking tax breaks. The 631-page bill, according to Fair Taxes for All, a coalition of 330 national, state, and local groups, includes tax loopholes for makers of bows and arrows and fishing tackle boxes, NASCAR track owners, brewers and distillers, importers of Chinese ceiling fans, and a host of other special interests.

"An early Christmas gift for corporate fat cats," says Keith Ashdown of Taxpayers for Common Sense in Washington.

The bill, though, does repeal an export subsidy that the World Trade Organization has ruled to be illegal, closes some corporate tax shelters, and extends some expiring user fees. The WTO provision would end 12 percent tariffs put on 1,600 US export products by the European Union. In theory, the new revenue in the bill almost offsets the reductions from the tax breaks.

In practice, critics say, when the various gimmicks are taken into account - slow phasing in of tax cuts, expiration dates for certain tax cuts likely to be extended, and so on - the package probably will add $80 billion over the next 10 years to the deficit, says Joel Friedman of the CBPP.

One concern about the rising imbalance is what it will mean for Social Security and Medicare. In four years, the first baby boomers will start to retire. "That's the ultimate problem with the budget situation," says Collender.

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