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Deficit expected to top $400 billion

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WASHINGTON — Congress' top budget analyst warned Tuesday that the government is on track this year for a record deficit exceeding $400 billion, providing fresh fodder to President Bush and Democrats in their battle over taxes and spending.

The nonpartisan Congressional Budget Office had estimated last month that the 2003 shortfall would surpass $300 billion. But that was before lawmakers approved fresh tax cuts for families and investors plus aid for cash-strapped states, projected to cost $61 billion this year alone. It also did not fully reflect the economy's malaise, which has constricted revenue.

The deepest shortfall ever, $290 billion, occurred in 1992. This year's deficit will be the second straight, a jarring turnabout from the four consecutive annual surpluses that marked the last years of the Clinton administration.

"The president has us on an utterly reckless course," said the Senate Budget Committee's top Democrat, Kent Conrad of North Dakota, referring to budget pressures that will intensify when the baby boom generation starts retiring late this decade.

Republicans said their push for tax cuts and restrained spending would energize the economy and help erase the red ink.

"The president's fiscal policy is to increase take-home pay," said White House budget office spokesman Trent Duffy. "And through greater economic growth, we get on a path to a return to balance."

For years, Republicans decried federal imbalances and used them as a rationale for spending cuts. In recent months, many in the GOP have minimized the importance of the shortfalls, saying they are manageable in a $10.5 trillion economy.

"The deficit we care about is the jobs deficit," said Sen. George Allen of Virginia, who heads the Senate GOP's election efforts.

In a role reversal, it is mostly Democrats who have taken up the cry for dealing with long-range budget problems.

"The best way to ensure that we, as well as our children and our grandchildren, are overtaxed for the rest of our lives is to keep borrowing money to cover our deficits," said Rep. Charlie Stenholm, D-Texas.

Though unprecedented shortfalls loom, polls indicate that voters are far more concerned about the economy and the specter of terrorism. Historically low interest rates have cushioned the budget problem's impact on the public, blunting its emergence as a potent issue.

Even economists, while expressing concern over long-term fiscal difficulties, showed little alarm over the latest figures. Private analysts have long expected this year's deficit to exceed $400 billion, and many say flushing that money into the economy will help keep today's economic conditions from worsening.

"Budget discipline has been thrown out the window in Washington," said Ethan Harris, chief U.S. economist for Lehman Bros., the investment bank. "It's a long-run problem for the economy."

The new budget office numbers emerged as Bush and lawmakers craft legislation to establish new prescription drug benefits for Medicare recipients expected to cost at least $400 billion over the next decade. Other spending increases are expected later this year for defense, education, combatting AIDS overseas and other areas.

The Senate also has approved a bill expanding tax cuts for some lower- and higher-income Americans. House GOP leaders are discussing adding items to that measure.

Tuesday's budget office report, a monthly analysis of Treasury Department data, estimated a $291 billion deficit for the first eight months of the federal budget year, which runs through Sept. 30.

That is double the $145 billion shortfall for the same period a year ago, and $1 billion more than the previous record for an entire budget year.

"The deterioration in the short-term budget outlook stems from continued weakness in revenue collections" and May's tax cut legislation, the report said. That bill cut taxes by $330 billion through 2013 and provided a two-year cash infusion of $20 billion for states.

So far, federal receipts are down by $60 billion, or 4.9 percent, from a year ago, with the largest decline in individual income taxes. Spending is up by 6 percent, or $86 billion, largely due to the military, Social Security and Medicare.

A $400 billion deficit would be nearly 4 percent as large as the U.S. economy, a measure many economists consider significant because it illustrates the government's ability to afford its red ink.

As the condition of the budget worsened in the 1980s and early 1990s, there were seven annual federal deficits that were at least that large compared to the economy.

Bush and top lawmakers neared an agreement Tuesday to limit Congress to adding about $5 billion, or just over 1 percent, to its original plans for domestic programs for next year.

They hope to finalize details of the deal this week, which could help them minimize year-end battles and complete Congress' spending legislation near the Oct. 1 start of fiscal 2004.