White House sees smaller federal deficit this year

WASHINGTON (Reuters) - The White House on Tuesday slashed its forecast for this year's budget deficit to $296 billion, crediting its tax cuts for the improvement, but Democrats said the deficit's size was nothing to boast about.

The updated projection for the 2006 fiscal year was $127 billion lower than the $423 billion shortfall the White House forecast when it unveiled its budget in February, but only slightly below the $318 billion dollar gap of 2005.

A surge in tax receipts from businesses and wealthy individuals lay behind the improved fiscal picture. The White House attributed the higher revenues to the economic growth spurred by the 2001 and 2003 tax cuts.

The additional tax payments helped offset a big rise in spending, fueled by the costs of the Iraq war and the rebuilding following Hurricane Katrina.

President George W. Bush welcomed the numbers. "The economy is growing, federal taxes are rising and we're cutting the federal deficit faster than we expected," he said.

However, some analysts said a strong driver of the revenue jump has been taxes paid on stock-market windfalls. Such receipts can be very volatile.

"I look at it as a welcome increase in revenues that helps the short-term situation, but I don't think it changes our fundamental fiscal outlook, which is still pretty bad," said Robert Bixby, executive director of the Concord Coalition, a budget watchdog group.

Democrats pointed to a bleak fiscal record under Bush, who came into office in January 2001 amid record surpluses that have shifted to deficits in the hundreds of billions.

The budget gap hit a record $413 billion in fiscal 2004, and the government was last in the black in 2001 when a $128 billion surplus was reported.

Sen. Kent Conrad of North Dakota, senior Democrat on the Senate Budget Committee, said U.S. debt "continues to pile up at an unsustainable rate."

He said the deficit would "explode" over the long term "as the rising cost of the president's tax cuts collide with the coming retirement of the baby boom generation."

LONG-TERM CONCERNS

Private analysts and experts at the Congressional Budget Office also have said they expect a deficit of around $300 billion for the 2006 fiscal year that ends in September.

The latest White House forecasts put the 2007 budget deficit at $339 billion, down from the February projection of $354 billion. In 2008, the deficit was seen shrinking to $188 billion versus a previous forecast of $223 billion.

White House budget chief Rob Portman said the administration penciled in a figure of $110 billion for spending on the wars in Iraq and Afghanistan in fiscal 2007. For 2008, its projections include war spending of $50 billion.

The administration has in the past been accused of obscuring the effects of war spending on the budget by not fully factoring in expected future costs in budget estimates.

Democrats accused the administration of inflating the budget deficit forecast issued in February in order to subsequently highlight a picture of improvement

"That's insane," White House spokesman Tony Snow said. "This is not something where somebody says, 'Give me an inflated budget deficit so we can look better in July."'

The recent improvement in the budget outlook comes against a longer-term backdrop that Democrats and Republicans agree is troubling. In coming years, retiring baby-boomers will pressure on budgets as they sign up for government-backed retirement and health-care programs in record numbers.

(Additional reporting by Rick Cowan)