TOPICS > Economy

Record Budget Deficit

July 15, 2003 at 12:00 AM EST
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TRANSCRIPT

GWEN IFILL: First, new projections and new concerns about the deficit. Today’s estimated deficit of $455 billion for 2003 was $150 billion higher than the previous estimate made by the White House just five months ago.

The White House says the increase was caused by several factors, including: $66 billion in lower revenues from the sluggish economy; $47 billion for the war in Iraq; $26 billion in additional appropriations; and $13 billion from a state-aid and tax-cut package enacted in May.

But how big a problem is this growing deficit? We get answers from budget players in both parties. Joshua Bolten is the new director of the Office of Management and Budget for the White House. Representative John Spratt of South Carolina is the senior Democrat on the House Budget Committee. Welcome, gentlemen.

GWEN IFILL: Josh Bolten, could you explain to us why the deficit is 50 percent higher than it was five months ago?

JOSHUA BOLTEN: Gwen, I think you just said it. We had much lower receipts than we expected because the economy remains is weaker than we wanted to be. We had expenses for the operations in Iraq. And then we also had some additional spending from the jobs and growth tax cut that was enacted earlier this year. By far the smallest part of all of that was the tax cut. What really — what really caused the increase in the last six months was the economy has remained too weak which underscores the wisdom of having done the tax cuts in the first place.

GWEN IFILL: Congressman, what about that explanation does it make sense to you?

REP. JOHN SPRATT: Well, this time last year OMB told us the deficit for fiscal year ’03 would be $109 billion. In February, they increased that to $304 billion. That was just five months ago. They now tell us they were off by 50 percent five months ago knowing in February that a war was likely coming. So my concern is that as bad as the numbers are they may actually be worse, turn out to be worse. One reason is that they do not include anything for the incremental cost of our deployment in Iraq and Afghanistan. The Pentagon told us last week that the cost is running at a rate right now of $5 billion a month. Hopefully some of that will be diminished over the coming months but it wouldn’t be a surprise at all to see a supplemental for another $40 billion if so the deficit in fiscal year ’04, next year, could easily be over $500 billion.

GWEN IFILL: Mr. Bolten, is that the elephant in the room if you’ll forgive the term that the cost of war is not included in this estimate?

JOSHUA BOLTEN: The cost of war is on going operations in Iraq in ’04 are not included but it’s not the elephant in the room. We expressly pointed that out in the report that we released today. Even if costs remain as high as they do today at the burn rate they are at today in Iraq, that is not going to change the numbers picture very much. The real problem we’ve had is that economic growth has been too sluggish. The way to bring deficit numbers down and the way to restore jobs to the economy is through growth in the economy. The tax cuts have been very well designed to do precisely that. We’re very hopeful we’ll see that taking effect beginning in the second half of this year.

GWEN IFILL: Congressman, the other argument the White House made today is that when you add up these numbers as a percentage of the Gross Domestic Product of GDP that it’s really not so bad that it went up from 2.7 percent to 4.2 percent, which is about within the realm of acceptability — does that sound right to you?

REP. JOHN SPRATT: In past years we routinely until the 1990s ran deficits. We preached against them but nevertheless we continually ran deficits. If you use that as a norm it’s kind of a bogus norm in my opinion. In any event, the past is not comparable to the present. We have a unique demographic situation staring us in the face. There’s 77 million baby boomers marching to their retirement as we speak. Right now they’re in the peak years of their productivity, but by 2008 they’ll begin to retire, draw on Social Security, then Medicare, and the demographics of that will double the number of people on Medicare and Social Security. We should be right now husbanding our assets, paying down our debt not building up our debt to prepare for the burdens that their retirement will cast upon us and our children.

GWEN IFILL: Mr. Bolten, I want you to respond to the bogus norm that Mr. Spratt is talking about but I also want you to talk about Medicare and Social Security burdens, which are facing us.

JOSHUA BOLTEN: I’d actually agree with the congressman on that. We do face a serious problem. It’s way in the out years but we do face a serious problem with the large unfunded liabilities that we face in our entitlement programs. We need to address that. But where we are today the problems we have faced in this country come from an economy that entered into recession just at the beginning of 2001. A stock market in collapse, a September 11th terrorist attack, a war on terror and loss of confidence in corporate America. All of those things together required bold measures which the president has undertaken both to confront terror, protecting the homeland and prosecuting the war on terror abroad, and to take measures to bring the economy back to life. The president has done that with his tax cuts. That’s what is happening now in the short term. In the long term we need to be very concerned about what we’re doing with our entitlement programs. But that’s really a separate subject. We need to get back to growth which is going put us on a good deficit path and at the same time address the fundamental reforms that are needed in Social Security and Medicare.

GWEN IFILL: Mr. Bolten, while you are talking about growth I want you to respond to the notion that the percentage of GDP is not the correct number to gauge whether this is really a big increase in the deficit.

JOSHUA BOLTEN: It’s the right number to gauge whether this deficit is going to have a bad effect on the economy. And right now it does not appear to be having a bad effect. We would see that in substantially higher long- term interest rates which are now at historic lows. So, 4.2 percent of GDP – I agree with the congressman — it’s higher than we want it to be but we don’t see evidence that it’s having a detrimental effect on the economy and, in fact, in the last twenty years there have been six years where we have had a higher deficit as a percentage of GDP. It’s not totally out of the norm but we need to bring it down.

GWEN IFILL: Mr. Spratt, tax cuts — you just heard the White House official, Josh Bolten, say that without tax cuts this would be a bigger deficit. They are stimulative and they are not the cause of this deficit. What is your response to that?

REP. JOHN SPRATT: Let me give you something in a nutshell. Total tax cuts between 2002 and 2011 come to about $3.746 trillion. The total deficits during that period of time are $3.6 trillion. That’s back-off-the envelope accounting but nevertheless the comparability of those two numbers is striking. No doubt terrorism is taking a toll on the economy and the budget — the same for the recession. But tax cuts too particularly in these circumstances have taken a severe threat — toll on the economy. They say in their presentation today that in effect the projection of the surplus, a cumulative surplus of over ten years of $5.6 trillion was off. They missed it by 53 percent. They overestimated it for economic and technical reasons. That means we have a much smaller surplus to start with and all that surplus has now been — the remaining surplus has all been committed to tax cuts. That’s one reason we’re in the situation now. So if there’s additional spending for the war it goes straight to the bottom line and adds dollar for dollar to the deficit. If there’s additional tax cuts and they’re still coming – they are still coming — the leadership in the House says we’re going to have a major tax cut every year, then those tax cuts go to the bottom line. There’s no surplus to off set them and they add dollar to dollar to the deficit. And that’s why the deficit is swelling to $455 billion.

GWEN IFILL: Mr. Bolten your response to that?

JOSHUA BOLTEN: I couldn’t disagree more with Congressman Spratt’s envelope there– not just on the numbers but the concept here. The problem we have had with our budget arises principally and I mean principally from the economic situation we have faced. That $5.6 trillion estimate, the rosy estimate of surpluses that we might have actually it wasn’t there; it didn’t exist. It was a total misestimate based on rosy expectations about where the economy was headed. In 2001 the economy was leaded into recession. The tax cuts made it the shortest and shallowest recession on history and since then have kept us out of recession going forward. We need to keep the policies in place. The exact wrong thing to do would be to contemplate raising taxes.

GWEN IFILL: Mr. Bolten, $453 billion is a big amount. Is that a best case scenario for deficits or is it a worse case scenario? Could it get worse?

JOSHUA BOLTEN: You know, we can never know exactly where we are but we think we have done a pretty conservative estimate. We have in the number you cited which is an estimate of the ’03 budget deficit; we have included costs for the war on Iraq. We have included very conservative estimates about what we expect in receipts. So I think it’s going to be right on target. Hopefully we’ll do even better if we get growth restored to this economy and if we get the cooperation of Congressman Spratt and others in the appropriations process this fall to restrain spending.

GWEN IFILL: $455 (billion) this year, $475 (billion) next year; he just threw the gauntlet on the table about restraining spending. Is this a worst or a best case scenario?

REP. JOHN SPRATT: Well, most of the spending increases have occurred in defense. We have increased the defense budget $100 billion, not including supplementals, over the last three years. That’s a big increase. We also have a whole new account in the budget called homeland security. We’re now spending over $40 billion a year on homeland security. $20 billion of that was being spent before 9/11, it has been reclassified.

GWEN IFILL: Is that money you wouldn’t spread?

REP. JOHN SPRATT: That’s money I would spend we need to spend the money but that’s the principal source of spending increases. When you see these percentage rates of how much spending has increased, it’s for things that both the administration and Congress have supported. The Congress is not running wild increasing it and in any event Republicans control both Houses.

GWEN IFILL: Mr. Bolten, today, you put out a chart showing that your predictions are that in 2006 the deficit will start going back down. How do you know that and do that?

JOSHUA BOLTEN: That is based on the economic projections and, as I said, they’re based on every conservative economic projections. But they do require two things, which is that we keep on a path toward growth, the signs of which are emerging now in the economy and that we exercise restraint in spending. We have been growing discretionary spending and that does include defense spending at about 7 or 8 percent for many years. The budget that the president sent up and the budget resolution that the Congress adopted earlier this year says that we can’t grow that more than 4 percent. The president intended to stick to that number as the appropriations process goes forward. And I would hope we would get the cooperation of Congressman Spratt and others in sticking to that number.

GWEN IFILL: Mr. Spratt did you expect to ever see surpluses again? Do you think that 2006 target date is a good one?

REP. JOHN SPRATT: Well, hope springs eternal but we have a long way to do go. My concern is that, number one, these numbers actually may be worse. The plan of process that the only thing they present is a solution. Plan of process is this hope, expectation that the economy will get up and start running again at a pretty robust rate; their projections according to our arithmetic assumes that we’ll have to start going at 4 percent in this quarter and the next quarter to attain a rate of 2.8 percent this calendar year and the next calendar year it will have to be close to 4 percent again in order to do what they are talking about. Let’s hope it happens but in the meantime lots of other things could happen. And, as I said, the out year projection the $575 (billion) big as it is doesn’t include anything for the incremental costs for the deployment in Iraq and lots of other things that are not included in that number. I would say that is a risky estimate. It could well go up.

GWEN IFILL: We’ll leave that debate there tonight, Congressman John Spratt and OMB Director Joshua Bolten, thank you both very much.