White House Predicts $427 Billion Deficit, Including New War Costs

By EDMUND L. ANDREWS and JOHN O'NEIL

New York Times

January 26, 2005

WASHINGTON, Jan. 25 - White House officials predicted this afternoon that the budget deficit would hit a record $427 billion this year, including an additional $80 billion that President Bush will ask for mostly to cover the costs of the war in Iraq.

White House officials said today that they were still on track to fulfill Mr. Bush's campaign promise of cutting the budget deficit in half by 2009.

But the administration is already well behind on its goal. The White House predicted last summer that the budget deficit would decline in 2005 and continue to sink after that.

The officials said Mr. Bush would ask Congress next month for the extra $80 billion when he submits his budget next month for fiscal 2006. The new request would bring total costs of the war to more than $200 billion by the end of this year, with spending likely to continue at near current levels through at least 2006.

The new estimate calls for the budget to climb slightly, and a new report earlier today by the nonpartisan Congressional Budget Office shows that deficits will remain above $350 billion through 2009 and climb sharply after that.

The Congressional Budget Office estimated that continued costs of the war in Iraq and other aspects of the war on terrorism could add $285 billion over the next five years.

The congressional agency also noted deficits would climb much more sharply in the subsequent five years. Extending Mr. Bush's tax cuts would cost $1.8 trillion over the next 10 years. Preventing an expansion of the alternative minimum tax, a parallel tax that was designed to prevent wealthy people from taking advantage of loopholes, would cost about $500 billion.

Even without the wars in Iraq and Afghanistan, and despite expectations of strong economic growth over the next two years, the Congressional Budget Office said the federal budget outlook worsened since last year.

Congressional analysts predicted that interest costs on the federal debt will double over the next decade to more than $300 billion a year.

Democrats quickly seized on both the administration's announcement and the new congressional report, accusing Mr. Bush of making things worse by pushing for big tax cuts at a time of war.

"The administration remains in denial about these fiscal results," said Representative John W. Spratt, Democrat of South Carolina and the ranking Democrat on the House Budget Committee.

The White House defended its fiscal record, and the presidential spokesman, Scott McClellan, said at a news briefing today that the president's deficit-reduction plan was "based on strong economic growth and spending restraint."

"By taking the steps that we have to get our economy growing stronger and creating jobs, we're also seeing increased revenues coming in," he said. "And by working with Congress to exercise responsible spending restraint, we've got a plan to cut the deficit in half over five years."

The Congressional Budget Office predicted that excluding the White House's request for $80 billion in additional money, the federal government would run a deficit of $368 billion this year.

The deficit for the 2004 budget year was $412 billion, representing 3.6 percent of the nation's economy. The deficit projection for this year, excluding growth in military spending and other budget changes, would represent 3 percent of the American gross domestic product, the budget office said.

Last year's deficit was the largest ever in terms of dollars, although the deficits run under President Ronald Reagan in the 1980's were larger as a percentage of the economy. President Bush pledged during last year's campaign to cut the deficit, and aides have said that his new budget will include a number of spending cuts.

But spending on military operations seems likely to continue to grow.

The request for $80 billion would bring projected spending on the conflicts in Iraq and Afghanistan to $105 billion for the 2005 fiscal year - a figure that far exceeds the administration's prewar estimates of overall costs.

The Congressional Budget Office also projected the 2006 budget deficit at $296 billion, and released a 10-year fiscal projection that estimated budget shortfalls over the next decade at $855 billion, down from its projection last year of $2.3 trillion. But the new report noted that the 10-year figure, like the projection for the coming year, would predict larger shortfalls if the full amount actually being spent on the conflicts were included.

Long-term budget estimates are notoriously unreliable, being based on assumptions both about economic activity and policy decisions yet to come. The budget agency stressed that the figures were not meant as a hard and fast prediction, but as a benchmark that policy makers could use to inform decisions about new proposals.

The estimates also exclude the cost of measures the president plans to introduce when he submits his budget to Congress next month. Those include the partial privatization of Social Security, which would require up to $2 trillion over the next decade to make up for money being diverted into personal accounts; the extension of tax cuts passed in Mr. Bush's first term, which would cut revenues by an estimated $1.8 trillion over 10 years; and the $350 million pledged by President Bush for tsunami relief efforts.

The budget agency said that its figures were based on a prediction of strong economic growth in the next two years, based on an assumption that the economy has been performing under its capacity in recent years. But for later in the decade it predicts a slowing of growth as more members of the Baby Boom generation leave the work force and health care costs rise with the aging population.

And as in other years, the figures exclude the effect of the surplus being run by Social Security, which uses the excess to buy government bonds that it plans to use to pay benefits later in the century. The actual difference between non-Social Security revenues and spending projected for 2005 is $541 billion, not including the expected costs for the war in Iraq and Afghanistan. The actual spending gap in 2004 was $567 billion.

Representative Nancy Pelosi of California, the House Democratic leader, indicated that her party would likely support the White House's request for more money for military operations in Iraq and Afghanistan. Democrats "have pledged to give our armed forces the support the need," she said. But she promised that the Bush administration would face tough questions about its policies in Iraq, in particular over the failure to train and equip more Iraqi troops.

Ms. Pelosi said the new deficit figures "confirm that President Bush and Congressional Republicans have completely abandoned fiscal responsibility."

The chairman of the Senate Budget Committee, Judd Gregg of New Hampshire, called the deficit "too high" and said the Congressional Budget Office's report showed that it was time to "get serious about putting our financial house in order, beginning with short-term deficit reduction and then long-term control of entitlement spending."

"If we do nothing, our kids and grandkids will be overwhelmed by the costs of our inaction," Senator Gregg said.

Brian Riedl, a budget analyst with the conservative Heritage Foundation, said the figures showed strong growth in tax revenues, but even sharper growth in the government's spending on health care. Starting in 2006, when the new Medicare prescription drug benefit goes into effect, the cost of Medicare and Medicaid will for the first time exceed the cost of Social Security, Mr. Riedl said.

The Congressional Budget Office's report projected that spending for Medicare will rise at a rate of 9 percent a year through 2015, and for Medicaid at 7.8 percent a year.

As mandatory costs for the health programs and Social Security go up, along with interest payments to finance the rising national debt, the percentage of the budget going to discretionary programs - that is, everything else - will shrink over the next decade, according to the new forecast.

Edmund L. Andrews reported from Washington for this article, and John O'Neil from New York. David E. Sanger contributed reporting from Washington.