WASHINGTON -- With the soft economy reducing government tax collections, President Bush's projected $410 billion budget deficit for 2008 could climb to $500 billion or more, according to new estimates.
Even White House officials don't dispute that the economy has decelerated more than they expected when they began drafting their latest budget last fall. The budget "was realistic given the facts at the time," budget director Jim Nussle said Friday. "But obviously those facts have changed, and we're in a tough period."
As a result, the official projection of $410 billion could well prove to be optimistic, he acknowledged. He noted a recent decline in corporate tax receipts as a particular concern.
Earlier this week, Goldman Sachs raised its estimate for the fiscal 2008 deficit to $500 billion, citing a 15% dropoff in corporate tax receipts through February compared with a year earlier, among other factors.
While that's an enormous amount of money by any standard, administration officials hasten to add that the 2008 deficit, whatever the final total, likely will be within the range of prior federal deficits, at least when measured against the size of the U.S. economy.
The post-World War II record was set in 1983, when the deficit reached 6% of gross domestic product. At $500 billion, the 2008 deficit would be about 3.6% of GDP, Goldman estimated. The federal government is expected to spend about $2.9 trillion in fiscal 2008, which ends Sept. 30. Mr. Nussle called the 2008 deficit "manageable."
Whatever the final deficit for 2008, it promises to be much bigger than the $162 billion deficit for 2007, and reverses three years of improvement since 2004. One obvious reason is a $160 billion fiscal stimulus measure that Mr. Bush signed to limit the economic damage from the slowdown. Now, though, the economic weakness is adding to the government's fiscal burden.
"It's not good news," said Rep. John Spratt (D., S.C.) chairman of the House Budget Committee. He said the reports of bigger deficits reflect some analysts' belief that the current economic weakness could be "deeper and longer than most people had hoped."
In the recent past, the Bush administration has had a track record of overestimating deficits when it releases its budgets in February. Then when the White House reassesses the budget picture during the summer -- and again when it reports on the fiscal-year-end totals in October -- the administration often has been able to show improvement. White House officials deny overstating February estimates to generate good news.
It is risky to predict the outcome based on the government's financial performance through February, notes Richard Kogan of the Center on Budget and Policy Priorities. This year, though, it seems increasingly likely that the government's actual fiscal results in October will be worse than the White House projected in February. That means there could be bad fiscal news just as the presidential campaign crescendos.
Even so, it is hard to predict which of the candidates will gain or lose politically. Sen. John McCain, the likely Republican nominee, favors most of the Bush policies that have done the most to widen deficits, including the tax cuts, wars and other spending increases for the military.
On the other hand, the Arizona senator has made a mark trying to cut wasteful spending in Washington, particularly congressional pork-barrel spending known as earmarks. And both his Democratic rivals -- Sens. Hillary Clinton of New York and Barack Obama of Illinois -- are promising lots of new domestic spending and little in the way of cuts.
Some experts believe voters don't pay attention to deficits. "If you're asking whether this will be an issue the candidates will focus on, the simple answer is no," says Robert Reischauer, a former Congressional Budget Office director who is president of the left-leaning Urban Institute. Particularly given the improvement over the last few years, "it will be viewed as quite temporary." But if the economic downturn proves to be deep and persistent, that could have a big impact, Rep. Spratt said.
Many analysts believe the new estimates suggest that the deficits, if they persist, will have to be addressed directly by the next U.S. president and Congress in 2009. That could mean a round of tax increases and spending cuts similar to the budget summits of the 1990s. "My biggest fear is that there will be a big push for a bipartisan summit," said Chris Edwards of the libertarian Cato Institute. "Famously the spending restraints in past deals have never panned out, but the tax increases have been longstanding."
At a minimum, deficits are likely to constrain policy options next year. For Democrats, that could damp prospects for expanding health-care opportunities, aiding struggling homeowners, and reforming the tax code to reduce the impact of the alternative minimum tax. Particularly for Republicans, it could limit the ability to extend various Bush tax cuts, which generally expire in 2010. It could also force a reexamination of defense and homeland security spending.
Then there's the need to face up to the long-term problems of Social Security, Medicare and Medicaid, which are projected to grow to unsustainable size as baby boomers age. The Concord Coalition, a fiscal watchdog group, estimates the total shortfall in Social Security and Medicare at $72.3 trillion through 2080.
"The budget is unlikely to be balanced again until Social Security and Medicare are fundamentally reformed," said Brian Riedl, an analyst at the conservative Heritage Foundation.
Write to John D. McKinnon at john.mckinnon@wsj.com
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