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Economy tethers Bush budget
Seattle Post-Intelligencer
February 5, 2007

WASHINGTON -- One major unmentioned entry in President Bush's new budget is luck. Luck that the economy keeps growing, that corporate profits remain robust, that inflation stays tame and that foreigners keep lending the U.S. money. Otherwise, the numbers don't add up.

Bush's spending outline also assumes an exit strategy from Iraq that even the president's supporters see as wishful thinking - a sharp drop in war spending in time for the 2008 presidential election. It's a peace dividend without peace.

Not surprisingly, Democrats were quick to criticize.

Senate Majority Leader Harry Reid, D-Nev., cited a "deception to hide a massive increase in debt." Senate Finance Committee Chairman Max Baucus, D-Mont., said, "The president's eyes are shut tight to this country's fiscal reality."

House Budget Committee Chairman John Spratt, D-S.C., doubted Republicans - let alone any Democrats - could embrace the president's $2.9 trillion budget for the accounting year that begins next Oct. 1.

Like Bush, newly empowered Democrats are also talking about increased defense and homeland security spending and a balanced budget in five years. And, while Bush's budget calls for making expiring tax cuts permanent, Democrats have a wish list of increased domestic spending. Both make balancing the budget even harder.

Thus, Democrats who now control both chambers of Congress need the same run of good economic news that Bush does to make their numbers work.

A business slowdown or recession, an increase in inflation and interest rates, a reversal in the willingness of foreign investors to keep buying U.S. Treasury bonds could put the skids on what has been a strong economy.

Meanwhile, spiraling payouts in guaranteed federal benefits for Social Security and Medicare as baby boomers retire "is going to be the single largest economic problem that we face," said Mark Zandi, chief economist for at Moody's Economy.com.

"Deficits look OK today," Zandi said. "But what happens at a time when the economy isn't operating at full tilt?"

When Bush took office in 2001, the national debt was about $5.6 trillion. Now it stands at about $8.6 trillion.

Democrats won control of Congress last November, largely by riding a wave of public discontent over Bush's handling of Iraq.

"We heard loud and clear from Congress" that it wanted "more transparency" in defense spending, White House Budget Director Rob Portman said Monday.

That's why, Portman said, the Pentagon included details for the upcoming budget year on how much the war would cost - an estimated $141.7 billion for fighting in Iraq and Afghanistan, as well as the cost of repairing and replacing equipment lost in combat.

In the past, such war costs were not included in the president's annual budget. Instead, emergency "supplemental" spending bills were submitted.

In the new budget, with a bookkeeping wave of the hand, the war-cost entry drops to $50 billion for the budget year that begins Oct. 1, 2008 - just a little more than a month before Election Day - and drops to zero for subsequent years.

Portman told reporters the $50 billion, followed by zeros for the next three years, was just an "allowance" or a "placeholder" because of the difficulty of estimating longer-term war costs.

But the entries complicate efforts to chart a trajectory toward Bush's 2012 balanced-budget goal.

"I don't think you get `transparency points' for acknowledging what is pretty much crystal clear to 300 million Americans, which is that the war is going to have costs this coming year at the same time you're calling for a surge in troops," said Gene Sperling, a former top economic adviser in the Clinton administration.

The amount spent on the wars in Iraq, Afghanistan and other anti-terror activities already tops $500 billion, according to the nonpartisan Congressional Research Service. In another year it will rival the inflation-adjusted $660 billion spent on the Vietnam conflict.

But strong U.S. and global economies are helping to mask present war costs.

"There's a lot of surplus capital looking to be invested, and thus far those funds have been invested in U.S. treasuries, and therefore the world is financing our deficits," said Thomas Mann, a scholar at the Brookings Institution, a liberal-leaning think tank. "That has helped keep inflation and interest rates low, and therefore the costs of the wars in Iraq and Afghanistan have been easier to tolerate."

Brian Riedel, budget analyst at the conservative Heritage Foundation, said tax revenues are running above the historical average but "there's no way to balance the budget or solve our long-term problems without addressing Social Security and Medicare."

He gives Bush good grades for proposing overhauling both benefit programs to shore up their solvency - even if he can't win the cooperation of Congress.

"Congress is out of his control. But at least he's trying," said Riedel.


EDITOR'S NOTE - Tom Raum has covered national and international affairs for The Associated Press since 1973.

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