Projections for the U.S. budget deficit just got a whole lot worse. And while economists dispute the precise numbers, many find the trend worrisome.
According to the Congressional Budget Office, the federal government will incur a total deficit of $401 billion this year and $480 billion in 2004 "if current laws and policies do not change." Over the next 10 years, deficits are forecast to reach $1.4 trillion.
In previous updates, the nonpartisan office had forecast a deficit of $246 billion for 2003 and an accumulated surplus of $891 billion in the 2004-13 period.
"These things are not to be taken very seriously," said Paul Kasriel, chief economist at Northern Trust. "It was only in 2001 when they were projecting surpluses as far as the eye can see."
Nevertheless, Kasriel said, it is "certainly reasonable to expect" that the country will be running significant deficits for some time to come. He noted that military spending will likely remain strong for a number of years. In addition, Congress is currently deliberating a $400 billion Medicare prescription drug program. Like other industrialized nations, the U.S. is also facing a huge increase in expenditures for baby boomers.
The number of people of retirement age is expected to jump by roughly 80% over the next three decades, raising costs for federal health and retirement programs, the CBO said. Meanwhile, the number of workers whose taxes help pay for those benefits is forecast to grow by just 15%.
Kasriel said the government is "throwing a party" for the American public and that at some point, it will come to an end.
"Who is paying for the Medicare prescription drug benefit? We're putting it on the country credit card," he said. "At some point, the rest of the world is going to wonder how we can pay the interest on the funds they've advanced us."
The net effect will be higher inflation, higher interest rates and a weaker dollar over the next five years, Kasriel believes.
Anirvan Banerji, director of research at the Economic Cycle Research Institute, said the numbers provided by the CBO should be taken "with a grain of salt."
"These projections are compiled by taking recent trends and projecting them far into the future," he said. "That is a fundamental problem, although I can't think of a better way of doing it. These projections lag economic performance."
Banerji said, however, that the CBO numbers are a warning. "If indeed this is the direction in which things are going, there is the potential for interest rates to go higher and that would squeeze out private investment," he said.
The CBO said its new projections stem from two pieces of legislation enacted this spring: the Emergency Wartime Supplemental Appropriations Act and the Jobs and Growth Tax Relief Reconciliation Act.
"Legislation enacted since CBO's previous baseline projections were published in March has increased the deficits and reduced the surpluses projected for the next 10 years by a total of $1.6 trillion," the CBO said in its report.
In dollar terms, the shortfall this year would be the largest in U.S. history. The previous record was set in 1992, when the deficit reached $290.4 billion. Relative to the size of the U.S economy, however, the projected gap would be smaller than the deficits of the 1980s.
The CBO said the budget will finally return to a surplus in 2012 and 2013 but only if expiring tax provisions (except some related to the alternative minimum tax) are not extended.
Diane Swonk, chief economist at Bank One, thinks it likely that the tax cuts will be extended, and she believes the budget deficit could "get close" to $1 trillion in as little as two years.
"The good news is the economy is coming in stronger and that will help to mitigate some of the losses near term, but we're also upping the ante on spending," she said, noting that the government might have to spend another $10 billion a year for the military.
Swonk said that while the economy probably will do well over the next couple of years, it will come at the expense of growth later in the cycle. "We're literally borrowing from the future," she said.
Other economists are less concerned. David Gitlitz, chief economist at Trend Macrolytics, said the CBO hasn't "got the foggiest idea what will happen in 10 years." He believes the deficit is largely the result of the economic recession and said the government has "made an investment in the future" by cutting taxes. "The number means nothing in terms of economic reality," he said.