U.S. deficit up a bit, budget office says

WASHINGTON – After a year of political battles over budget cuts and pork-barrel spending, the federal budget deficit will be slightly higher than a year ago, with red ink ending in 2012 only if President Bush’s tax cuts are allowed to expire, the nonpartisan Congressional Budget Office said Thursday.

The CBO forecast a $337 billion deficit for this fiscal year and lingering deficits through the end of the decade, offering a pessimistic backdrop as Bush prepares to release his 2007 budget request in the coming weeks. The deficit fell to $318 billion last year after three years of sharp increases, and Republicans had hoped the tide of red ink was finally receding. But spending on hurricane relief will push the deficit back up in 2006.

Additional spending on the war in Iraq and federal flood insurance claims, not counted in CBO’s official projection, is likely to leave the deficit around $360 billion by Sept. 30, when the current fiscal year ends, said the acting CBO director, Donald Marron. And that deficit will come despite strong economic growth and rebounding tax receipts.

Assuming a phase-down of troops in Iraq and an extension of expiring tax cuts, the CBO projected that Bush will not meet his goal of cutting the deficit in half by 2009. Indeed, under those assumptions, the deficit would dip no lower than $222 billion before swelling back to more than $300 billion by 2016. These projections do not include a fix, promised by both major parties, to the increasingly onerous alternative minimum tax. That would keep the average deficit well above $300 billion over the next 10 years, with the red ink topping off at $405 billion in 2016, CBO projections say.

“Not much has changed,” said Marron, who recently joined the agency after serving in the Bush White House.

The CBO forecast will challenge Republicans to cut still deeper in an election year, especially because Bush once again urged making the tax cuts permanent. Such a fight would pit fiscal hawks against moderate Republicans reluctant to slice further into social programs and against GOP leaders who have used home-district spending to bolster the re-election chances of members in marginal districts.