With deficit pledges, it's easy to welch

Here's something many Washington budget experts can agree on: The next president is not likely to deliver on pledges to cut the federal deficit. In fact, the red ink could rise unless there's a big economic surge.

So whoever takes over the White House next January probably faces a stark choice: raise taxes or watch interest rates rise.

Of course, no one can say that during the campaign season. Instead, the candidates take a tough stand against government red ink. President Bush has repeatedly promised to halve the deficit in five years. His Democratic opponent, Sen. John Kerry, has gone him one better, declaring he will halve it in four.

Can they do it?

It's "hard to take ... seriously" the Bush claim, says Stan Collender, author of "The Guide to the Federal Budget."

It's "unlikely" Mr. Kerry can achieve his budget goal, adds Robert Greenstein, executive director of the liberal Center on Budget and Policy Priorities (CBPP).

"The deficits aren't going to go away" whether a Republican or a Democrat occupies the White House, concludes economist John Irons, of OMB Watch, a Washington group seeking "accountable" government. Rather, barring unforeseen toughness in Washington, deficits will probably get worse over 10 years.

To begin with, President Bush doesn't really plan to cut the deficit in half. That takes tough measures. Instead, he plans to halve it as a percentage of the nation's gross domestic product (GDP) - its output of goods and services. So, merely normal growth in the economy over the next five years would shrink that GDP-to-deficit ratio sizably and leave a large deficit in dollar terms.

Here's another way to make the budget look better. In its mid-session review 10 days ago, the White House's Office of Management and Budget (OMB) claimed progress for fiscal 2004. It projected a deficit of $445 billion, down from its $521 billion forecast last February. OMB credited a stronger economy, resulting from the Bush tax cuts.

That's hooey, several budget experts agree. Back in February, CBPP economist Richard Kogan took the administration to task for purposely overestimating the 2004 deficit so it could announce significant progress before the presidential election. In fact, the deficit is up $70 billion from $375 billion in fiscal 2003.

The progress announced by the White House is really "political spin," says Mr. Greenstein. He figures the deficit will add up to $4 trillion to $5 trillion in the next 10 years.

Of course, the big budget story is the slide from big surplus to huge deficits during the Bush presidency. A large part of that deterioration is not his fault, stemming from the stock market's meltdown and the recent economic slump. But even according to OMB figures, more than half of the slide - 57 percent - was caused by the Bush tax cuts.

Tax cuts can stimulate the economy. At this point, however, federal revenues represent only 16.2 percent of GDP - the lowest level since 1959. So, by historic standards, Americans aren't overtaxed by Washington. And the government is doing far more than it did in 1959, having added the expensive Medicare program and other spending programs.

Under current policies, federal outlays for interest on the national debt, Social Security, Medicare, and defense and homeland security will rise in the years ahead, especially when baby boomers start retiring in 2008. So, there will be no funds left for education, national parks, student loans, highways, and other spending programs generally prized by the public, says Mr. Irons. To pay for them will require more federal revenues.

There are two ways to boost government revenue: grow the economy or raise taxes.

Wall Street economist Lawrence Kudlow maintains that a bustling economy will do the trick, shrinking the deficit quickly. Or if corporate executives got rich fast with stock options, as they did in the late 1990s, revenues might shoot up, adds Mr. Kogan.

But many analysts figure that whoever wins the election will need to trim the deficit, probably with tax increases, or face higher interest rates. Rates would go up because government borrowing would compete for dollars that would otherwise get lent to the private sector.

So who's likely to do the better job on the deficit? Bush and Kerry do differ in their approaches.

Last week, Kerry provided new details on his plans. On the plus side, he wants higher taxes for those making more than $200,000 a year, an end to tax breaks that encourage firms to move jobs overseas, and the closing of abusive international tax loopholes for corporations.

On the other hand, he proposes new tax cuts for the middle class, a 5 percent drop in the corporate tax rate, new spending on health insurance for uninsured Americans (costing $650 billion over 10 years), and an extra $200 billion for education.

Bush so far talks only about extending his tax cuts. That includes repeal of the estate tax beyond 2010, costing Uncle Sam $982 billion over 20 years, says Irons. Bush also wants new tax breaks in energy, health insurance, and charitable giving.

Kogan estimates the Bush programs are "a little more expensive" in terms of federal revenues than the Kerry plans. He also notes that Kerry promises that if circumstances change, he will scale back his initiatives. The Bush approach, he adds, has been to push forward with tax cuts or other budget measures, regardless of their impact on the budget deficit.

"The upside risk to the Kerry numbers are smaller than the risk to the Bush numbers," he concludes.

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