White House, Democrats divided over budget deficits

White House budget director Mitchell Daniels said the dramatic decline in federal government revenues this year was mostly due to the bear market in stocks, while Senate Democrat majority leader Tom Daschle blamed the Bush adminstration's fiscal policy.

"The current shortfall represents the mirror image of the revenue explosion" that began in 1995 with the booming stock market, Daniels said in a press briefing on the White House's semiannual budget and economic forecasts.

The government now sees a $165bn (€166.6bn) deficit this year, thanks to higher spending on homeland defence since Sept 11, and to a historically deep decline in revenues.

The 6% drop in revenues projected this year from 2001 would mark the biggest decline since 1955, the White House said.

While revenue from taxes on regular wages has grown, income from capital gains taxes and revenue indirectly related to the stock market - such as from taxes on bonuses tied to stock market performance - has declined sharply, Daniels said.

The historic decline in revenue is therefore "almost entirely" related to the stock market's descent into a bear market over the past year, he stated.

The bigger deficit comes in spite of faster GDP growth this year than previously assumed, Daniels noted.

The traditional budget models look at the link between economic growth and revenue shifts, but "that's become somewhat disconnected," Daniels said, because of the large impact stock market trends have had on revenues.

"We underestimated by a very large margin economic growth" for this year, he noted, with GDP growth in 2002 now seen at 2.6%, up from 0.7% in the previous forecast in February.

"And yet...revenues were even lower" than the budget projections in February, leaving the deficit forecast much worse in 2002 than it was at the beginning of the year.

The $165bn (€166.6bn) deficit forecast for this fiscal year, ending Sept 30, would be the biggest deficit since 1994, and the first year in the red since 1997.

"I'm not surprised," said Senate Majority Leader Tom Daschle, when asked about the downward revision to the deficit projection.

"Actually, we have been predicting now for some time that the dramatic increase in the size of the deficit would be one that would have to be recognised," he said.

Daschle clearly put blame on the Bush administration's 11-year, $1.35trln (€1.36tln) tax cut from last year, and its efforts to enact further tax cuts in fiscal stimulus packages since Sept 11.

"This is a clear editorial on the fiscal policies of this administration. I have said before that it was a disaster. I think the numbers today demonstrate why I believe that," Daschle said.

Although Congressional Democrats earlier criticised Republicans for attempting to use "dynamic scoring" in budget projections, by including theoretical future gains to tax revenue from the faster growth that tax cuts allegedly produce, the White House did not use this mechanism.

Congress has established a "task force" to take a look at the question of dynamic scoring, noted White House Press Secretary Ari Fleischer in a press briefing.

"The President leaves the scoring decisions to (Congress)," he said.

Asked about expectations for revenue related to stock market gains next year, Daniels said the White House budget office sees only modest growth in 2003.

He added that the office's models do not include factoring in trends in stock market valuations, but this now may need to be looked at.

"We need to try to understand this phenomenon better," he said.