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Fiscal Budget Experts Predict Larger Deficit Than Expected

By Warren Vieth
LOS ANGELES TIMES -- washington

Congressional budget experts warned Tuesday that the government’s fiscal outlook is deteriorating, and they forecast deficits that will be deeper and longer than the Bush administration is projecting.

Instead of the three-year, $322 billion shortfall predicted by the White House last month, the government will post four consecutive deficits totaling $452 billion, according to the Congressional Budget Office.

The main factor in recent months has been a sharp drop in federal tax collections, the biggest since special wartime levies were lifted in 1946. The current fall-off has been caused in large part by the effect of the stock market’s declines on payments of capital gains taxes. At today’s prices, fewer shareholders are recording profits when they sell.

More red ink could flow if the economy grows slower than expected or if lawmakers approve new tax cuts, extend prescription drug coverage to Medicare participants, or boost other spending.

The revival of deficit spending after four years of surpluses may increase the anxiety level of Americans already troubled by the residue of last year’s recession and the stock market’s big declines earlier this year. That, in turn, could affect the outcome of this fall’s midterm congressional elections, in which control of both the Senate and the House is up for grabs.

The backlash could be magnified this year if enough voters accept Democratic arguments that Bush and congressional Republicans mortgaged the Treasury and jeopardized Social Security by pushing through a 10-year, $1.35 trillion tax cut last year.

“This has got to be a concern to the White House going into the midterm election,” said Kim Wallace, chief political analyst for Lehman Brothers, the big investment banking firm. “It has a strong probability of being the leading factor in decisions made on Nov. 5.”

Bush and his fellow Republicans argue the initial stages of the tax cut eased the recession that was beginning just as the administration took office. They blame the deficits on the recession, the economic impact of the Sept. 11 attacks and the cost of the U.S. response to the terrorism.

The CBO’s new deficit calculations could increase pressure to rescind some of future tax cuts approved by Congress last year, particularly those targeted at upper-income households. Similarly, it will make it more difficult to win support for new spending initiatives.

The revised budget estimates reflect an unusually rapid decline in the government’s fiscal outlook. Early last year, CBO officials predicted the government would take in $5.6 trillion more than it spent from 2002 through 2011. On Tuesday, it said Washington would finish the decade only $336 billion ahead of the game.