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The Deficit's Warm and Fuzzy Wrapper

By Howard Gleckman Washington is always surreal. It's just that sometimes it's more surreal than usual, and this week of the State of the Union address has been one of those moments. In an extraordinary bit of legerdemain, President George W. Bush on Jan. 28 trotted out a massively expensive agenda, demanding that a profligate Congress hold the line on spending -- and yet insisting that the Administration's growing deficits hardly matter. The President's aides have spent months arguing with Congress over $10 billion in new spending, even as Bush used his State of the Union address to roll out new initiatives that would add a staggering $1.5 trillion to the budget deficit over the next decade.

Let's start with the little stuff, such as $450 million for mentoring children of prisoners and $1.2 billion for hydrogen-car research. Then look at the midprice initiatives such as $10 billion to fight AIDS in Africa and the Caribbean. Finally, the big-ticket goodies -- the $400 billion Medicare reform to give seniors access to plans that cover prescription drugs, the $670 billion tax cut, and, of course, the war against Iraq that looks more and more likely each day.

BALLOONING BILLIONS. The cost of the war and its aftermath is unknowable. But most analysts start at $50 billion and work up. Finally, throw in an additional $300 billion or more for interest on all the extra money Uncle Sam will have to borrow to pay for this stuff.

The backdrop to this tour de force came from the Congressional Budget Office, which, on Jan. 29, released its grim budget forecasts. The deficit for this year will be $199 billion, the CBO estimates. For 2004: $145 billion. But that's before the wars on terrorism and Iraq, and the cost of Bush's tax cuts are factored in. And it assumes domestic spending will increase by only about 2% a year, instead of the 8%-plus we've seen in recent years.

Plug in real numbers, and near-term deficits will top $300 billion for years to come. Bush's own budget, due out next week, will pretty much concede those estimates.

HIGHER, HIGHER. Most troubling, this isn't likely to be a short-term deficit that will correct itself once the economy gets back on track. The CBO figures growth will average a healthy 3.2% a year over the next decade. It's a pretty good rate -- but not nearly enough to push back the rising sea of red ink.

Here's the rub: The CBO excludes those new long-term promises that Bush and many in Congress are pitching. For example, while Bush says Medicare reform, including a new drug benefit, would cost $400 billion over the next decade, Democrats want to spend hundreds of billions more than that. And the real price is likely to be much higher than Bush claims.

The President's own budget, due out next week, will also propose additional tax cuts not included in his ballyhooed stimulus plan. Just one -- permanently repealing the estate tax -- would empty the Treasury of more than $50 billion a year. And then there's the price of fixing the alternative minimum tax, which, if not scaled back, would clobber one-third of all taxpayers by the end of the decade. That fix would cost more than $500 billion.

THE HOLE TRUTH. Bush's calculations have lots more omissions. But let's step back for the broader view. A couple of years ago, policymakers talked about wiping out the $3.4 trillion national debt by the end of the decade -- and they were serious. Now, some analysts fear the U.S. is headed for a $6 trillion national debt. Yet the President told Congress in his address, "We will not pass along our problems to other...generations."

In an effort to inoculate the White House against its own, shockingly high deficit numbers, Budget Director Mitch Daniels has been making the rounds, dribbling out the bad news and insisting these deficits are nothing to worry about. In one interview with The Washington Post, Daniels said getting back to fiscal balance should be a priority. And he added, "We can do it in a year or two. All we'd have to do is limit spending growth to inflation and undertake no new initiatives." Sounds like a great idea. Too bad nobody told his boss. Gleckman is a senior correspondent in BusinessWeek's Washington bureau. Follow his views in Washington

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