Last year's deficit hit $159 billion, but political impact may be minimal

Friday, October 25th 2002, 12:00 am

By: News On 6

WASHINGTON (AP) _ After the Bush administration announced that a $159 billion federal deficit has ended four straight years of surpluses, both parties immediately tried using the news to their advantage.

The White House released the figure on Thursday, blaming the red ink on the faltering economy and deflated stock market, which caused a dip in federal revenue, and on the costs of battling terrorism.

``Together, these events created a deficit,'' said Treasury Secretary Paul O'Neill. ``But going forward, I am confident that we are on the road to recovery and stability.''

With deficits back, ``It is absolutely essential that we set aside business as usual and keep tight control over all other spending,'' said White House budget chief Mitchell Daniels.

Democrats tried to blame the fiscal turnabout on Republicans in hopes of enhancing their chances of capturing House control and strengthening their hold on the Senate in the Nov. 5 elections. They have long blamed the budget's decline _ especially in the long term _ on the 10-year, $1.35 trillion tax cut President Bush won from Congress last year.

``Republicans are responsible for the biggest fiscal reversal in history,'' said Thomas Kahn, Democratic staff director of the House Budget Committee. ``The $5.6 trillion surplus has vanished.''

That was a reference to a January 2001 projection by the Congressional Budget Office that surpluses would total $5.6 trillion over the decade running from 2002 through 2011. By last August, CBO had whittled that unprecedented bundle of projected federal cash to $336 billion, citing the recession, the costs of terrorism and the tax cut.

Both the White House and the Congressional Budget Office say they expect annual surpluses to return in a few years. Many analysts say those projections are optimistic because they assume that future federal spending will grow by only about the rate of inflation, much less than it has in recent years.

``The real problem occurs in future years, when the expensive provisions of the Bush tax cut kick in,'' said Senate Budget Committee Chairman Kent Conrad, D-N.D. ``It's the cost of these provisions that will keep us deep in deficit, right as the baby boom generation begins to retire.''

Democrats also argued the shortfall would look even larger were it not for last year's Social Security surplus, which was about $160 billion.

Even so, analysts and members of both parties say they believe the revived red ink will probably have little effect on the upcoming elections. That is because many members of the public are unaware that deficits are back, and many of those who are blame it on the recession and the costs of fighting terrorism, not on politicians.

``It's important, but nobody's paying attention,'' said Robert Reischauer, president of the liberal-leaning Urban Institute and former director of the nonpartisan Congressional Budget Office.

Though the fiscal 2002 deficit was only the 11th worst in U.S. history, what was remarkable was the breathtaking contrast with the previous year. In 2001 the government enjoyed a $127 billion surplus, the second biggest ever.

Though there have been greater one-year swings in federal deficits and surpluses measured by percentages, never before has the bottom line swung by $286 billion in a single year.

This year's shortfall is expected to have a minimal effect on the country's $11 trillion economy. But if deficits persist, they could constrict policy-makers' abilities to boost spending for priorities like defense and schools or to cut taxes further, ensuring years of partisan budget warfare.

``Structural imbalances exist that will perpetuate these deficits for the foreseeable future,'' Reischauer said. ``This is essentially like the canary in the mine shaft.''

Administration officials had been predicting for nearly a year that the government would be back in the red in fiscal 2002 after running surpluses every year since 1998. Many analysts saw that as an effort to get the bad news out early and gradually, rather than dumping it out all at once just before Election Day.

Congressional aides had been told to expect the deficit figure to be released Friday. White House officials instead provided the number a day early, a busy news day dominated by the capture of two men connected to the Washington-area sniper spree.

The 2002 deficit, based on data collected by the Treasury Department, came from receipts of $1.853 trillion and expenditures of $2.012 trillion. Fiscal 2002 ran through Sept. 30.