Debating how dire federal-debt picture may become

Mitchell Daniels gave Washington a shock late last month. The director of the White House's Office of Management and Budget said the federal budget would be in deficit through fiscal 2005.

"Politically, everything we have been promised and told about in the past four years hasn't happened," says Stanley Collender, a budget expert with Fleishman-Hillard Inc., consultants in Washington.

What of the touted $5 trillion budget surplus this decade? Gone with the tax cut, recession, and counterterrorism costs.

So, federal debt held by the public - about $3.3 trillion now - won't disappear in this decade. The debt pile might be even larger 10 years from now, speculates the Democratic side of the Joint Economic Committee of Congress.

Prospects for a prescription-drug program for the elderly are diminished. There will be less money for education and infrastructure, such as highways and railways.

Maybe the aim of Mr. Daniel's deficit talk was to brake spending by Congress and requests for funding by federal bodies.

"Every White House finds it far easier to get the departments and agencies to go along with what the president wants the first time around than with any of the subsequent budgets the administration prepares," Mr. Collender notes.

To their horror, some of these bodies have already been told their budgets will be cut 5 to 10 percent. "Whether Congress will go along with that, I would doubt," says Collender.

In any case, the White House's goal is to hold the growth in outlays for fiscal 2003 to 4 percent. If defense and other security-related expenditures for the FBI, CIA, Coast Guard, and so on grow rapidly to battle terrorism, other "discretionary" spending will have to shrink hugely.

The real budget situation may not be so bad as Daniels indicates. "He's blowing smoke," says Fred Ross, a budget consultant with the Schwab Washington Research Group.

Mr. Ross predicts a surplus of about $30 billion in the fiscal year that began Oct. 1. That's down from the $127 billion surplus in fiscal 2001.

Spending will grow 7 percent this year, he adds. Revenues will be up 3 or 4 percent. In subsequent years, the budget balance will depend on whether the economic recovery is vigorous or not, and on congressional spending and tax decisions.

Special factors are helping revenues this year.

One was that Congress, anticipating a large surplus in fiscal 2001, postponed corporate quarterly tax payments from September to October. That added $20 billion to 2002 revenues. The Sept. 11 disaster meant individuals could delay making their third-quarter estimated tax payments - another $20 billion. The Federal Communications Commission also anticipates $10 billion from selling broadcast spectrum.

With that boost of $50 billion, revenues could come in at about $1.99 trillion, down from $2.03 trillion in fiscal 2001, Ross loosely estimates.

That's not so bad. And if the economy starts growing again, each percentage point in gross domestic product adds at least $20 billion to federal revenues.

Further, only about half of the $40 billion emergency funding for defense, security measures, New York, and airlines will be spent this year, Ross figures.

But where did that massive 10-year federal surplus go?

Half went to last June's tax cut, according to a study by the Center on Budget and Policy Priorities (CBPP), a Washington think tank.

Many Democrats are already saying "I told you so" - that the $1.2 trillion cut plus $297 billion in interest payments on extra debt was too large.

The economic slowdown cost $719 billion, figures the CBPP. Extra spending for ongoing defense and nondefense programs adds $314 billion. The $40 billion emergency funding may continue, costing $286 billion over 10 years. And it expects the stimulus package now in Congress, including extra interest, to cost $152 billion.

Yet federal spending will remain a relatively small share of the economy, CBPP holds. It will continue to shrink in years ahead even if Congress does pass a prescription-drug benefit, a farm bill, expanded health insurance, and other such items.

During President Reagan's era, federal expenditures amounted to 22.1 percent of gross domestic product - the nation's output of goods and services. By 2010, federal outlays will be only 17.7 percent of GDP, the lowest since 1965, reckons CBPP.

If so, Republicans may have a harder time making charges stick that Congress is overspending.

Whether this year's budget turns out to have a modest surplus or modest deficit, budget experts agree that partisan fights will heat up. Money will be short; words will be abundant.

The Treasury says Congress must raise the legal ceiling on federal debt soon. Debt will bump against the present ceiling in February or March, says Collender. That issue should prompt sparks.

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