OMB director says evaporating surplus may cause deficit

Office of Management and Budget Director Mitch Daniels predicted Wednesday that rapidly evaporating budget surpluses could plunge the government into deficit spending next year.

"It's entirely possible that the `02 budget will be in modest deficit," Daniels said.

"There's a substantial stimulus package," Daniels noted, asserting that unless the spending rapidly spurred growth, "it would not be startling if we slipped into a two-digit deficit in `02."

But he quickly added that if, as many forecasters say, the economy rebounds next year--and if spending is held in check--the budget could be "back in the black" during fiscal 2003.

Daniels briefed reporters Wednesday in Washington, focusing most of his remarks on the $20 billion in new supplemental outlays the administration is proposing.

The sum, a portion of $40 billion in emergency funds being spent in response to the Sept. 11 attacks, will be handled as a normal appropriation: Congress has the ultimate say over how it is spent.

By agreement with Congress, the administration will spend the other $20 billion at its discretion, though Congress has the right to review and comment on $10 billion of this total.

The administration already has released $7.2 billion of its discretionary total. Daniels said a delineation of how the remaining $12.8 billion will be spent would be made over the course "of the next week or so."

Daniels and his staff are in ongoing discussions with New York officials about funding for that city. Daniels indicated that the administration would spend "somewhat more" than the $20 billion it has pledged for the New York City area, but he noted that "enormous uncertainties" remain about what New York will need.

Nevertheless, he expressed no inclination to consider New York GOP Gov. George Pataki's request for more than $50 billion in assistance.

Daniels said the approximately $9 billion in funds for New York released at this point is "far more than, in particular, [the Federal Emergency Management Agency] will be able to spend for a long time to come."

OMB is currently discussing other "ideas" with New York officials, especially in the area of economic development, according to Daniels.

And he said proposals by the President, including money that will be part of the economic stimulus package, add another $4 billion to the $9 billion total allotted so far.

Pledging to hold the line in total supplemental spending at $40 billion this year, Daniels indicated that more money might not be needed next year. He said the $40 billion was probably more than could be spent in FY02.

Meanwhile, speaking to a group of California business leaders before leaving for the Asia-Pacific Economic Conference in Shanghai, President Bush pledged Wednesday to "work with Congress" to help workers who have lost jobs "because of the sudden economic slowdown."

Bush also singled out a couple of tax cuts he wants in the stimulus package, calling for Congress to approve more tax relief for lower- and middle-income families, to "reform" the corporate income tax and to allow businesses to deduct more new investment costs.

Despite the worsening budget outlook, Daniels said Bush would continue to pursue domestic initiatives not acted on this year.

He did not rule out comprehensive Medicare reform, but expressed hope that Congress would take a serious look next year at Bush's more limited "Immediate Helping Hand" proposal to provide seniors with prescription drugs.

Lawmakers did little to advance the proposal this year.