"If you have a deficit for one year, that is not a big deal," says Gus Faucher, senior economist at Economy.com. "The concern is if you have a structural imbalance a long-term divergence between taxes and spending."
And that is what some private forecasters see. "We are looking at budget deficits through the end of the decade and into the middle of the next," says Stanley Collender, managing director of the Federal Budget Consulting Group at Fleishman-Hillard Inc. "Higher government borrowing almost certainly means higher interest rates for the average person."
For example, he says, "In a year or two, as adjustable-rate mortgages that people refinanced last year start to come due, they are going to adjust upwards by two full percentage points or more. And that is the equivalent of putting a tax on homeowners."
Mitchell Daniels Jr., director of Mr. Bush's Office of Management and Budget (OMB), takes a more optimistic view of the government's financial outlook.
The current budget deficit at 1.6 percent of gross domestic product (GDP) "is pretty small, particularly compared to those coming out of recessions," he says. Still, he told reporters at a Monitor breakfast this week, "I treat any deficit as a negative phenomenon."
Mr. Daniels disputes the link between deficits and interest rates, and argues that the government has "a fighting chance to get back to balance by 2005." Yet he says that eliminating red ink is contingent on "three big ifs": an economy performing to expectations, the absence of major unexpected events, and holding down nondefense spending. "It won't be easy, but we are not going to assume the defeat of the American taxpayer," Daniels says.
Many forecasters say Daniels's assumptions are overly optimistic. Next year, OMB is projecting the federal budget deficit will decline to $109 billion. Republicans on the Senate Budget Committee are predicting a fiscal 2003 deficit of $194 billion.