Print this

Email this

Submit a Question

And now for something completely different: The Bush administration will work hard to reduce the federal budget deficit.

Or at least that's what Greg Mankiw, chairman of the White House’s Council of Economic Advisers, said in an interview with FORTUNE.com last week. "It's the administration position that we want these deficits to shrink," he says. "The way to do that is a combination of more rapid growth, which will bring in revenues, and restraining government spending. Restraining government spending is a key part of the program. We don't want deficits to get out of hand."

There is reason to doubt this will happen. So far, President Bush, aided mightily by a willing Congress, has been one of the biggest spenders and tax-cutters around. Indeed, budget deficits have soared for the federal government over the past two years. A combination of economic sluggishness, the global war on terrorism, increased spending for homeland security, the war in Iraq, deep tax-cutting, and a dearth of spending restraint has the deficit ballooning to over $400 billion a year.

Specifically, the White House’s own budget office projects that the deficit this fiscal year, ending September 30, will hit $455 billion. Next year’s deficit is estimated at $475 billion.

These immediate shortfalls, while too high, are manageable, Mankiw says. Over a year or two, "the budget deficit of 4.2 percent of GDP is manageable in the sense that we've had budget deficits this large in the past," he says. "Anything you'd do in the short term to try to reduce that budget deficit would probably act against the goal of job creation. In the short term it would be a mistake to reduce the budget deficit as the first priority. That would sacrifice other priorities that are more important."

In the "medium term," he says, deficits are expected to fall. "Over the...five- to 10-year horizon, budget deficits are shrinking, from about 4 percent of GDP to about 2 percent of GDP. That's the right glide path."

But in the long term, deficits must be brought down through strict limits on government outlays, especially in so-called "entitlement" programs such as Social Security and Medicare, he adds. "Over...10, 20, 30 years, we do face what we've called the real fiscal danger, and that is as the baby boom retires and Social Security, Medicare spending go up," says Mankiw. "There will be forces pushing spending up. That's why entitlement reform is the big challenge going forward."

President Bush gave a signal of this new emphasis on deficit reduction last week when, after meeting with his economic advisers in Crawford, Texas, he said that he didn’t expect to propose any additional major tax cuts this year. The reason, he said, was that there already was enough economic stimulus in the pipeline to bring back robust economic growth and job creation. The tax cuts he's championed and the deep reductions in interest rates by the Fed should be enough to return the nation to financial health and soon, Bush asserted.

His administration predicts that the Gross Domestic Product will grow by about 3 percent in the second half of this year, and will reach upwards of 4 percent next year. That should be enough, White House forecasters say, to begin to stem the loss of jobs that have plagued the nation for the last two years and bring down the unemployment rate.