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CBO predicts deficit will reach $368 billion, without Iraq spending

WASHINGTON—The federal budget deficit will hit $368 billion this fiscal year, Congress' top budget analysts predicted Tuesday—and that doesn't include mushrooming spending on the war in Iraq.

The Congressional Budget Office made public its projection just as the White House announced it will seek $80 billion in emergency spending for this fiscal year, most of it to pay for military operations in Iraq.

By White House calculations, those war costs will drive this year's deficit to $427 billion. If the CBO is right, the extra $80 billion will drive the deficit to $448 billion. No explanation was available Tuesday for the difference between the two figures.

Whatever their size, the exploding deficits are likely to influence how Congress tackles a Republican agenda that calls for overhauling Social Security and making President Bush's first-term tax cuts permanent. Those two initiatives alone could cost the federal government another $3.5 trillion by 2015.

America's massive federal budget and foreign-trade deficits are already spawning global financial anxieties and driving down the value of the dollar. The United Nations warned Tuesday that the twin U.S. deficits are pulling the world economy off balance.

President Bush has vowed to cut the federal budget deficit in half during his second four-year term, but world governments and financial markets increasingly fear that Washington cannot control its spending. CBO projects federal budget deficits will total $855 billion over 10 years starting in 2006, a number that also does not include the costs of war in Iraq or Bush's new proposals.

The worsening financial outlook increases pressure on Republicans eager to pursue Bush's priorities, and on Democrats, who increasingly argue for fiscal restraint, to accept spending cuts in programs they hold dear, including Medicare and Medicaid.

Though last year's budget deficit was $412 billion, CBO director Douglas Holtz-Eakin said the new number, though lower, masks a deteriorating fiscal picture because it does not include new spending in Iraq and Afghanistan.

"On an apples-to-apples comparison, legislation passed during the previous year has moderately worsened the budget outlook," Holtz-Eakin said.

Still, CBO also offered some upbeat calculations, predicting that during the next two years, the U.S. economy will grow at a "healthy pace." Growing consumer demand will drive business to hire more workers, lifting employment. Over the next 10 years, CBO projects that the U.S. economy will grow at an average annual rate of 3.1 percent. That's slightly lower than the average annual growth rate since 1950 of 3.5 percent.

Congressional reaction to the numbers fell along partisan lines, with Republicans vowing to reduce the deficit by slowing spending, particularly on so-called entitlement programs such as Medicare and Medicaid. Democrats said that some tax increase will be necessary to drain the red ink.

"Deficits are not good, but they are not the worst thing," said Sen. John Cornyn, R-Texas. "The main thing we need to do is rein in runaway federal spending. There are some things that are not optional—the defense budget, homeland security. We need to look at entitlement spending to do that."

Sen. Kent Conrad of North Dakota, the top Democrat on the Senate Budget Committee, noted that federal tax revenue will barely equal 17 percent of the nation's gross domestic product, the lowest percentage since 1959. Indeed, CBO said that revenue from individual income taxes in 2004, as a percentage of GDP, was the lowest since 1951.

"Seventy-four percent of the change in our fiscal condition is because of revenue loss," Conrad said, blaming tax cuts during Bush's first term for creating deep deficits.

Senate Majority Leader Bill Frist, R-Tenn., said that Congress' task is "hugely challenging. ... It means that we have to look at everything. Everything needs to be on the table, and most important, we need to figure out how to grow this economy, which is where the real answer is going to be."

Some budget watchdog groups, however, despaired that the government's long-term fiscal outlook is bleak.

"Nobody is talking about reining in entitlement programs, and no one is talking about repealing the tax cuts in any way," said Robert Bixby, executive director of the Concord Coalition, a bipartisan pressure group devoted to balanced budgets. "When you look at the factors driving the deficit, they look very difficult to reverse. What you need to worry about is a spike in interest rates and a plunge in the dollar, or maybe rising inflation."

A U. N. report released Tuesday said that U.S. budget and trade deficits could present problems internationally.

"The seemingly intractable nature of the United States twin deficits suggests continuing dollar weakness ... there is a risk the dollar could decline further," said the U.N.'s World Economic Situation and Prospects 2005 report. "This could pose difficulties for all other countries, notably those whose currencies float against the dollar."

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(c) 2005, Knight Ridder/Tribune Information Services.

GRAPHIC (from KRT Graphics, 202-383-6064): 20050125 DEFICIT

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