Budget office predicts slight increase in deficit this fiscal year

The nonpartisan Congressional Budget Office on Thursday forecast an increase in the fiscal 2006 deficit to $337 billion, an amount about the same size relative to the economy -- 2.6 percent of gross domestic product -- as the $318 billion deficit recorded in fiscal 2005, and up slightly from the 2.3 percent average since 1965.

The increase in dollar terms is driven mostly by hurricane-related costs totaling about $50 billion in fiscal 2006, as well as $30 billion resulting from introduction of the Medicare prescription drug benefit this month, CBO said. But those increases are partly offset by continued increases in revenue due to a strong economy, said acting CBO Director Marron.

"Overall, from sort of a macro perspective, there isn't that much new here," Marron said. "When you focus on the economic side of the projection, our story is basically one of the U.S. economy has momentum and is growing strongly, and we expect that to continue in the near term."

Economic growth is expected to fall from 3.6 percent this year to 3.4 percent next year and drop to 2.6 percent in fiscal 2012 and beyond.

By law, CBO cannot factor in policies that have not yet been passed by Congress. After accounting for new spending that will be needed for military operations in Iraq and Afghanistan and to pay flood insurance claims stemming from hurricane-related devastation, CBO said the deficit would widen to roughly $360 billion, a figure supported by some Wall Street analysts as well as Democrats on the House and Senate Budget committees.

Marron said based on current monthly spending of $7 billion to $7.5 billion, Congress would need to approve a total of $90 billion for the war effort this calendar year, including $50 billion included in the fiscal 2006 Defense spending bill President Bush signed into law last month. Spending on flood insurance claims could add $20 billion to $25 billion more.

CBO also cannot assume GOP tax cuts will be extended because Congress has not yet acted. As a result, the report shows declining deficits beginning with $270 billion in fiscal 2007 and small surpluses beginning in fiscal 2012, for a total 10-year deficit projection of $832 billion.

"CBO's projections show the deficit making a decided improvement after 2010, but this results from expiration of the tax cuts passed in 2001, 2002 and 2003, a policy the Bush administration clearly does not support," said House Budget ranking member John Spratt, D-S.C.

Extending those expiring tax provisions over the next decade would add $2 trillion to the fiscal 2007-2016 deficit, CBO said.

Rapid growth is also expected, however, for the three major entitlement programs -- Medicare, Medicaid and Social Security. Those programs alone will eat up 8.7 percent of the economy in fiscal 2006, rising to 10.8 percent in fiscal 2016.

"Pressures will only build beyond the 10-year window," Marron said. "Obviously that's something that can't continue indefinitely."

The new forecast does not take into account the $40 billion, five-year deficit reduction package House Republican leaders aim to approve next week and send to the president's desk. That bill, which targets Medicare, Medicaid and other mandatory spending except for Social Security, would shave $5 billion from the fiscal 2006 deficit projection.