WASHINGTON - The federal deficit will hit a record $480 billion next year, more than twice the level forecast in March, the Congressional Budget Office said yesterday.
The nonpartisan agency said the annual budget shortfalls will total nearly $1.4 trillion over the next decade, a stunning reversal from the $5.6 trillion surplus the CBO forecast in 2001.
In a sign that the numbers could create trouble for President Bush's re-election campaign, Democrats blamed the higher deficits for a recent jump in interest rates.
Senate Democratic leader Tom Daschle of South Dakota said, "This unprecedented binge-borrowing imposes a heavy burden on Americans by increasing the cost of borrowing for businesses, home buyers and students."
Democrats predicted that government borrowing would be even worse than the CBO projection, which shows annual shortfalls giving way to small surpluses after 2012. They argue that the Bush administration's push to make temporary tax breaks permanent, combined with efforts to provide a Medicare prescription drug benefit and increase military spending, would wipe out any hope of a return to balanced budgets.
The CBO said deficits would grow by $1.6 trillion over the next decade if the tax cuts are extended, by $400 billion more if the drug benefit is enacted and by $400 billion more if Congress keeps the alternative minimum income tax from striking a growing number of middle-class families.
The administration blames the re-emergence of deficits on the sluggish economy, the Sept. 11 terrorist attacks, and the sharp rise in military and homeland security costs. It maintains that the fiscal outlook will brighten as the economy, bolstered by the Bush-backed tax cuts, becomes more robust.
Brian Keyser, chief U.S. economist for Citigroup Asset Management in New York, said the tax cuts may well help the economy in the short term but also will make the deficit problem worse later in the decade.
"We needed some stimulus, and we got it," Keyser said. "That's a good thing for '03 and probably '04, but these [tax cuts] are now baked into the cake for some time to come."
Over time, the loss of tax revenues will mean that government will have to borrow more, he predicted. And more government borrowing "slowly drives interest rates higher" as it competes with private credit markets, he said.
The CBO forecasts that the U.S. economy will expand more quickly next year, with real gross domestic product rising at 3.8 percent, up from 2.2 percent in this year. But it also predicts unemployment will remain high, averaging 6.2 percent this year and next.
The agency said that for fiscal 2003, which ends Sept. 30, the deficit will be a record-breaking $401 billion, a leap from the $158 billion deficit for the previous fiscal year. The last dollar record was $290.4 billion, set in 1992 under Bush's father.
Over all, the budget outlook "has worsened substantially" since its last review in March, the CBO said. The $480 billion shortfall predicted for next year was expected to be only $200 billion then, it said. And where it now sees $1.4 trillion in deficits through 2013, in March it predicted an $891 billion surplus.
Speaking in St. Paul, Minn., where he raised $1.2 million for his re-election campaign, Bush spotlighted his tax cuts, the centerpiece of his economic policy.
"When Americans have more take-home pay to spend, to save or invest, the whole economy grows, and people are more likely to find a job," Bush said.