WASHINGTON -- The Congressional Budget Office's new deficit forecast, due to be released next Thursday, matches the administration's $348 billion prediction for fiscal 1992, but it shows far less improvement in the future as the deficit lingers around $300 billion for at least one more year, CBO sources said.
The gloomier projections are largely due to an updated economic forecast underlying the deficit estimates, which the sources said will reflect a deeper recession and more subdued recovery this year than the agency expected in January.
Also, the CBO -- like the Office of Management and Budget -- sees a major shift in borrowing to finance the savings and loan bailout and Persian Gulf war from this year into 1992, catapulting next year's deficit to around $350 billion and reducing this year's expected deficit to around $280 billion, the sources said.
The unexpectedly sluggish economy will produce higher spending and revenue losses. These will increase each subsequent year's deficit forecast by "tens of billions of dollars" over the CBO's January predictions, as well as the OMB's current forecast, one CBO source said.
The deficit outlook for 1993 will be closer to $300 billion than the $246 billion projected by the OMB, or the $221 billion projected earlier by the CBO. 1994's deficit may hover around $250 billion rather than dip to CBO's earlier prediction of $170 billion or OMB's $132 billion prognostication, they said.
That means the deficit would exceed the current record of $221 billion for four years straight, with no end in sight for the triple-digit deficits that were supposed to be eliminated first by the 1985 Gramm-Rudman law and, more recently, by last year's budget agreement.
The CBO sources cautioned that the agency still sees some improvement in the deficit as a result of the $482 billion of spending cuts and tax increases included in the agreement.
"We continue to believe that the agreement was an important one for helping gain control of the deficit problem. If the agreement wasn't in place, the deficit would be that much worse," one source said.
Based on the assumption that Congress adheres to the budget agreement, the deficit could still fall in 1996 to less than 2% of the gross national product -- the lowest level in more than a decade, the sources said.
However, many private anlysts say CBO's and OMB's assumption that Congress will strictly comply in the coming years with the agreement's tight spending caps and other budget disciplines is optimistic.
"That's a mighty big assumption," says Lawrence Kudlow, chief economist with Bear, Stearns & Co. and a former OMB official, in a recent analysis.
Thus, some analysts may discount even the CBO's startlingly more pessimistic long-range projections, which stem almost entirely from the permanent increase in the deficit that the CBO now says is being caused by the recession.
The economic trough "raises the deficit base" in the future, one source said. "Even if you assume the same growth in the out years, it will not make up for the revenue loss" due to the recession, he said.
The CBO in January predicted 1991 would be a year of no growth over all, starting with a period of "mild recession" carried over from 1990 that would be offset later on by a "moderate recovery" in the middle of the year. The CBO in January saw growth picking up to 3.3% in 1992 and hovering a little below 3% in later years.
The OMB, in contrast, in its as-yet-unrevised January economic report included a more pessimistic short-term growth forecast but a more optimistic scenario in later years. In predicted an overall 0.3% decline in 1991, followed by growth exceeding 3% in the next four years.