Budget office revises forecast for deficit sharply downward

Congressional Budget Office analysts Wednesday forecast a $172 billion deficit for the fiscal year that ends Sept. 30, a marked improvement from the previous fiscal year and an even bigger drop from predictions CBO made in August.

The fiscal 2006 deficit was $248 billion, and CBO previously forecast a $286 billion deficit for fiscal 2007. If the new figures hold, it would be the lowest deficit figure in dollar terms in five years, and a $114 billion change from CBO's projection just five months ago.

In a report accompanying the new forecast, CBO said the shift was due mostly to lower than anticipated spending, including on Medicare, and to a lesser extent higher than expected revenues.

"We are now on a solid path toward the president's new goal to achieve a balanced budget by 2012, while making the tax cuts permanent and better constraining spending," Office of Management and Budget Director Rob Portman said in statement.

According to CBO, if current policies were to continue -- meaning tax cuts expire on schedule at the end of 2010 -- the budget would swing back into surplus in fiscal 2012, to the tune of $170 billion.

Since CBO must assume that current law will be extended in its projections, they also leave out the costs of providing a "fix" for the alternative minimum tax so that it does not hit more middle-income taxpayers. CBO also must assume current spending levels will continue, including war costs that are likely to be eclipsed by the White House's supplemental and regular defense budget requests.

CBO said if lawmakers extend President Bush's 2001 and 2003 tax cuts, provide a fix for the alternative minimum tax and allow discretionary spending to rise with overall economic growth, the accumulated deficit over the next decade will total $4.2 trillion -- far from the $800 billion surplus projected under current law. At the end of fiscal 2012, instead of achieving surplus, the deficit that year would be $328 billion.

"When these adjustments are made, the estimates from CBO become a bleak reminder of how much current policy will need to be changed to return the budget to a fiscally responsible course," House Budget Chairman John Spratt, D-S.C., said in a statement.

He noted that if money borrowed from the Social Security surplus were excluded, the deficit projection would be $362 billion for fiscal 2007. Spratt and House Majority Leader Steny Hoyer, D-Md., called on the White House and Republicans to support "pay/go" rules requiring that tax or new spending legislation not add to the deficit.

Portman said the White House's fiscal 2008 budget request, due Feb. 5, would project higher short-term deficits than the CBO report, due in part to higher built-in war costs, but would still achieve balance by fiscal 2012 while making President Bush's tax cuts permanent.

Portman said some of the savings would come from changes to entitlement programs such as Medicare and Medicaid -- deeper than what the White House sought last year. The Republican-led Congress did not go along with the more modest savings, however.