A surge of unanticipated tax receipts will push this year's deficit in the US down to $260 billion (€202 billion), a $58 billion improvement on last year's deficit. But the deficit will begin to rise again next year and would only improve substantially if President Bush's tax cuts are allowed to expire, the Congressional Budget Office (CBO) said.
The non-partisan office's semiannual deficit forecast - released just 82 days before hotly contested mid-term elections - may have particular political impact this year. Democrats are trying to use the government's deficit to bolster their case that Republicans have mismanaged the government since taking control of Congress and the White House.
"Instead of governing by the rules that every family must live by - pay-as-you-go spending - President Bush and his 'Rubber Stamp' Republicans are mortgaging our nation's future and piling debt on to our children," House of Representatives minority leader Nancy Pelosi said in a statement.
But Republicans point to the same figures to say their policy of annual tax cuts is bolstering economic growth and tax revenue.
"Thanks to pro-growth policies and a responsible budget blueprint, we're achieving substantial deficit reduction - even with the extraordinary circumstances of the past year, including Hurricane Katrina and the ongoing war on terror," said House budget committee chairman Jim Nussle. "We're clearly on the right track."
The CBO's figures provide ammunition for both sides. This year's deficit is not only projected to be lower than last year's, despite ongoing war expenditures and hurricane relief, but it is also $112 billion lower than the CBO estimated in March when it analysed the president's budget proposals.
Even after successive waves of tax cuts, tax revenue is rising faster than expected, and spending, especially on Medicare and Medicaid, has been less than initially projected. The near-term budget picture "has improved significantly", CBO analysts concluded.
But the longer-term outlook - clouded by baby boomers who will be retiring just as the reach of Mr Bush's tax cuts begins to expand - has "not changed materially", the report emphasised.
This year's $260 billion deficit is projected to rise to $286 billion next year and $328 billion by 2010, only to plunge when the tax cuts expire in 2011.
By law, the CBO projections must make some assumptions that lawmakers in both parties concede are unrealistic. The forecast assumes that all expenditures on the wars in Iraq and Afghanistan and on Katrina relief will continue at current levels through 2016.
But it also assumes Bush's income tax cuts, tax breaks for married couples and parents, the estate tax cut and dividends and capital gains cuts will expire en masse at the start of 2011. It also assumes Congress will stop its practice of passing annual stopgap measures to slow the expansion of the alternative minimum tax, a parallel income tax system designed to hit the rich but increasingly pinching the upper middle class.
More plausible assumptions - assuming no more hurricane spending, a reduction of forces in Iraq and Afghanistan, extension of Mr Bush's tax cuts and continued AMT relief - reveal a stubborn stream of loss that would rack up $2.5 trillion of debt over the next decade and average $254 billion a year, according to CBO calculations.
"The most important point to take from this report is that current fiscal policy remains unsustainable under realistic assumptions," said Robert Bixby, executive director of the Concord Coalition, a budget watchdog group.
Some small-government conservatives were not happy with the forecast's figures, either. Stephen Slivinski, director of budget studies at the libertarian Cato Institute, pointed to CBO figures that showed government spending increasing by 7.7 per cent this year, easily outstripping economic growth. The federal budget will hover around 20 per cent of the country's gross domestic product through the end of the Bush presidency, up from 18.5 per cent of GDP when Mr Bush came to office.
"It's a stark example of how the GOP [Republican National Committee, formerly Grand Old Party] has taken on the role of the party of big government," Slivinski said. But Republicans were in a celebratory mood.
"The federal budget deficit is being erased as a result of the pro-growth economic policies implemented by a Republican Congress, along with renewed focus on spending taxpayer dollars wisely," House majority leader John Boehner said. - (LA Times service)
