CBO lowers estimated 2006 budget deficit to $260 billion

The Congressional Budget Office predicted Thursday the fiscal 2006 federal deficit would fall to $260 billion, an improvement over the $318 billion deficit the previous year.

It is an even steeper decline from the $371 billion deficit CBO projected in March for fiscal 2006 when it analyzed President Bush's fiscal 2007 budget proposal. The White House last month projected the fiscal 2006 deficit would be $296 billion.

If measured as a percentage of the economy, the deficit would fall to 2 percent of gross domestic product in fiscal 2006 from 2.6 percent last year, according to the CBO report. That is lower than the 40-year historical average of 2.3 percent of GDP, and while acting CBO Director Donald Marron cautioned the figure was "neither high nor low," deficits around 2 percent of GDP were "sustainable indefinitely" and would not impose major strains on the economy.

CBO's 10-year outlook, even after accounting for extensions of Bush's tax cuts, forecasts annual deficits of roughly 2.3 percent of GDP over that period. But that does not factor in other costly actions such as altering the alternative minimum tax so it does not affect millions of middle-class taxpayers.

And if Congress does not rein in major entitlement programs, spending on Social Security, Medicare and Medicaid "will eventually exert such pressures on the budget as to make the current path of fiscal policy unsustainable," the report said, noting that as the elderly population grows, healthcare costs are steadily rising faster than the economy.

CBO's report cited higher than expected revenues from corporate and individual income taxes -- 4 percent higher than March estimates. That is coupled with 0.5 percent less government spending, as outlays for the major healthcare entitlement programs Medicare and Medicaid were lower than anticipated, helping to offset higher costs related to supplemental spending for the wars in Iraq and Afghanistan as well as Gulf Coast hurricane relief.

"The federal budget deficit is being erased as a result of the pro-growth economic policies implemented by a Republican Congress, along with renewed focus on spending taxpayer dollars wisely," House Majority Leader John Boehner, R-Ohio, said in a statement.

But Marron noted that economic growth was slowing from 3.5 percent in 2005 to 3 percent in the latter half of this year and continuing through 2007, leveling out at 2.6 percent in the last five years of the 10-year budget window as baby boomers leave the workforce. CBO said total federal debt is projected to top $9 trillion for the first time next year, reaching $11 trillion in fiscal 2011 -- which Senate Budget ranking member Kent Conrad, D-N.D., noted was just when the baby boomers begin to retire.

House Minority Leader Nancy Pelosi, D-Calif., said the new numbers "are just the latest evidence of the Republican failure to control spending and burden our future generations with mountains of debt." CBO estimates that the current $8.965 trillion statutory debt limit will be breached next year between the end of June and October, requiring congressional action to raise the cap.