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Red states won - now the red ink

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President Bush appeared quite cheery at his press conference last week. But that glow will be tested in the months ahead as he faces the task of putting America's fiscal house in order after four years of massive tax cuts and rampant overspending.

Everywhere he turns, pools of red ink lurk: a huge federal budget deficit, a record deficit in the current account (that is, a growing imbalance in the nation's international payments), a record shortfall in national saving, record household indebtedness, and the lowest level ever of personal savings. Some of these issues lie beyond the president's direct influence. But not the budget deficit. How Bush handles it will determine to a large extent the economic success of his second term.

"The next four years are going to be unusually challenging from the standpoint of America's economic stewardship," warns Stephen Roach, chief economist of Morgan Stanley, an investment firm. "Never before has the United States pushed the envelope to this degree.... The US economy is an accident waiting to happen."

There's one bright spot. The budget deficit, which reached $413 billion last fiscal year, may have peaked. One of the Bush tax cuts, a bonus depreciation for business, expires this year. That will add about $38 billion to revenues in fiscal 2005. The economic recovery could boost revenues another $38 billion, says the Congressional Budget Office.

That should help the president get a little closer to his goal of cutting the budget deficit in half (as a proportion of gross domestic product). But various budget experts doubt he can do it in five years, as he has promised.

The reason is that other expenses, such as Iraq, Medicare, and Medicaid, keep crowding in, and that the president has other priorities that will swell the deficit. For example, the first budget items on the Bush agenda probably will be the complete repeal of the estate tax, and then the extension of any other expiring provisions of the 2001 and 2003 tax cuts.

With a bigger Republican majority in the Senate, he will probably get them, says Charles Schultze, chief economic adviser to President Carter.

Repeal of the estate tax is favored by some Democratic senators. So it may easily gain a filibuster-proof 60 votes.

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