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Bush to project bigger deficits due to stock woes
( 2002-07-11 08:27 ) (7 )

The Bush administration will release new budget projections next week showing federal deficits will be bigger than expected in the near-term due in part to the stock market's sharp drop, officials said on Wednesday.

Larger budget deficits could deal another blow to US President George W. Bush's economic record. In the run-up to the November congressional elections, he is already under fire from Democrats for his administration's response to a wave of accounting scandals that have sent stocks tumbling to lows last seen in 1997.

Administration officials said the White House -- along with congressional and private sector forecasters -- underestimated the impact of capital gains in their earlier budget projections.

Even though economic growth was far better than expected in the first quarter of 2002, the decline in capital gains receipts dragged tax revenues down, officials said.

Capital gains taxes are generally collected from individuals when assets are sold at a profit. As stock values dropped this year, many investors racked up losses or held onto their shares. As a result, the federal government collected less revenue.

As a result, the White House Office of Management and Budget (OMB) is expected next week to increase the size of projected deficits for fiscal years 2002 and 2003 -- taking into account the decline in capital gains as well as emergency spending for the war on terrorism and homeland security.

In February, the budget office projected deficits of $106 billion in fiscal 2002, $80 billion in 2003 and $14 billion in fiscal 2004.

OMB's mid-year budget review, scheduled for release on Monday, will project a return to budget surpluses in fiscal 2005, assuming that Democrats, who currently control the Senate, stick to the administration's proposed spending levels, officials said.

"It (the mid-year review) will show that we will be moving back toward balanced budget -- a balanced budget that presumes spending restraint," White House budget director Mitch Daniels said this week.

UNDERESTIMATING CAPITAL GAINS

Administration officials say the Bush White House is not the first to underestimate the impact of sharp swings in capital gains receipts on the federal budget.

Former President Bill Clinton's projections often missed the mark. But in contrast to Bush's budget office, Clinton's underestimated the capital gains windfall as the stock market set record highs.

"In the late 1990s we had surprise revenue windfalls and everyone thought it was because GDP (gross domestic product) was growing," a Bush administration official said. "But we're finding that that was not the biggest factor. The bigger factor was capital gains."

The official said OMB reviewed the Bush administration's projections as well as those made by Clinton's budget office, and concluded that the impact of capital gains was being underestimated.

For Bush, the finding means he has a great deal riding on the health of the stock market, since a rebound would boost revenues and help shrink budget deficits.

But should the market sell-off continue, budget deficits could swell further, giving Democrats ammunition in upcoming elections where small swings could shift control in both the House of Representatives and Senate.

Democrats blamed the reemergence of deficits on Bush's $1.35 trillion tax cut, and warn that the shortfalls will erode Social Security and Medicare at a time when the baby boom generation is nearing retirement.

Republicans counter that Bush's tax cut helped the United States recover from the twin shocks of a recession and the Sept. 11 attacks. They blame a surge in government spending, not lower taxes, for the red ink.