The impact of a historic deficit

The presidency of George W. Bush is rapidly becoming Reaganesque in at least one area: the deficit.

That's right - the river of red ink that characterized federal budget policy in the 1980s and early '90s is back. Tuesday the White House released a midterm budget update that estimates this year's deficit will be $450 billion or more. In dollar terms, even after adjusting for inflation, that would easily be the largest such shortfall ever.

In the short term, the political effect of the rapid reversal from Clinton-era surpluses may not be great. An economic recovery could cause the budget picture to improve. And given the war in Iraq, the public seems amenable to increases in military spending.

But if nothing else, the new deficit numbers emphasize that the GOP is no longer the national party of green eyeshades. Tax cuts, not balanced budgets, remain the top Republican fiscal priority.

"You are not a fiscal conservative when the deficit runs to $400 billion on your watch," says Stan Collender, a budget expert at Fleishman-Hillard Inc.

The new deficit estimates were not a complete surprise. Private economists have been pegging this year's deficit figure at more than $400 billion for some time. House Democrats have issued a similar forecast.

But Tuesday's White House forecast was the first time the administration has had to formally acknowledge the scale of the budget problem. Previous official figures had put the fiscal 2003 deficit at just over $300 billion.

Only two years ago, the US government ended the year with its fourth straight surplus - $127 billion. Since then, the nation's accounts have suffered through their worst reversal ever.

Sluggish tax receipts are one big reason. With the economy still weak, the US may this year have its third straight year of declining tax revenue - the longest such streak since the Depression.

A poor economy can also cause government spending to increase, as claims for unemployment and other benefits rise.

But the rising tide of red ink is also caused partly by the initial effects of the recent 10-year, $350 billion tax cut. In April, Congress passed a $79.2 billion emergency spending bill for the Iraq war, further damaging the fiscal outlook. And administration budget officials are now incorporating Bush's promise for $400 billion in Medicare prescription-drug spending in their fiscal plans.

"It's a perfect storm for the budget," says Robert Bixby, executive director of the Concord Coalition, a fiscal watchdog group. "Taxes are going down, spending is going up, and politicians don't seem terribly concerned about it."

Of course, one possible reason that the deficit has yet to become the political issue that it was for a political generation in the 1980s and '90s is that it has yet to affect the pocketbook of many Americans.

Unlike the '80s, when interest rates reached into the double digits due to competition for funds from government borrowing, today's interest rates are historically low.

"It's hard for the average person to draw a direct connection between the deficit and their personal economic well-being," says Mr. Collender of Fleishman-Hillard.

By some measures, the deficit does not weigh on the economy as heavily as those of Ronald Reagan's and George Herbert Walker Bush's eras did.

A $400 billion deficit represents about 4 percent of the nation's gross domestic product, a level still lower than the peak years of the '80s and '90s.

Pressed on deficit questions at a congressional hearing, Federal Reserve Chairman Alan Greenspan said that tax cuts can help growth, but spending needs to be restrained as well. "I have been most concerned that after having gained considerable control over spending a decade ago, we've allowed that to slip," said Mr. Greenspan.

• Amanda Paulson contributed to this report.