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    Forecast warns of record federal deficits
    By Alan Beattie in Washington
    Published: August 26 2003 20:17 | Last Updated: August 26 2003 20:17

    The US could slide towards record deficits unless tax cuts are reversed or public spending sharply curbed, according to a new analysis by the US Congressional Budget Office.

    The non-partisan CBO, which produces Congress's official estimates of probable future deficits, confirmed earlier predictions that the federal deficit would reach $401bn (?367.8bn, £254.7bn) this fiscal year.

    Its "baseline" forecast - which assumes discretionary government spending grows only at the rate of inflation - shows the deficit rising to $480bn or over 4 per cent of gross domestic product next year before moving to surplus over the next 10 years.

    Near-term deficits are sharply higher than the CBO estimates published in March, largely as a result of the tax cut pushed through by the White House. The projections were similar to those released by the administration last month.

    But alternative scenarios produced by the CBO showed large deficits could continue over the next decade, given certain tax and spending measures. In particular, extending tax cuts due to expire over the next 10 years and expanding Medicare, the federal health plan for the elderly, to include a prescription drug benefit - both backed by the White House - would more than double the projected deficit and ensure that the public finances remained in deficit over the next decade.

    A more realistic growth pattern for public spending - keeping constant as a share of the economy - would mean the deficit would still be over $400bn by 2013.

    Conversely, freezing discretionary spending at its current level - a highly unlikely outcome - would almost eliminate the 10- year deficit.

    Douglas Holtz-Eakin, director of the CBO, said that although there was little evidence that deficits had caused damage in the recent past while the economy was operating below potential, their persistence when the economy had recovered would cause economic damage.

    "The key question is whether there will be sustained deficits at a period when the economy is closer to its full capacity," he said.

    Decried by some as a Republican stooge when he moved from the White House Council of Economic Advisers to be CBO director, Mr Holtz-Eakin has presided over CBO analyses that have given ammunition to both supporters and critics of the administration.

    The White House has argued that the tax cut it pushed through this year would boost the economy's long-run potential by increasing economic efficiency. But Tuesday's report suggested the cut would have an uncertain effect on improving efficiency in the short term and could prove negative in the longer term.

    The Democrats seized on the CBO report on Tuesday to argue that the administration was taking risks with the US's long-term fiscal health.

    But the White House, which this year dropped its 10-year forecasts in favour of five-year projections, said that such exercises were misleading.

    "The only thing we know about 10-year predictions is that they are drastically wrong," said Trent Duffy, a spokesman for the Office of Management and Budget.

    He also pointed out that the CBO had to assume that nearly $80bn in emergency defence spending raised this year to fight the war in Iraq would be repeated - increased by inflation - in each of the next 10 years, which he said was unlikely.

    The CBO previously estimated that the postwar occupation of Iraq would cost about $4bn a month. On Tuesday Mr Holtz-Eakin said the actual cost could be "a bit lower" but it was too early to update the figures.


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