US budget surplus slashed

President Bush's tax cuts have reduced revenues

The US government has slashed the budget surplus it predicts for 2001, as government revenues are set to be drastically reduced by tax cuts and the slowing economy.

The White House Office of Management and Budget cut its forecast surplus to $158bn for the financial year ending 30 September, down from the $281bn surplus projected in its April budget.

Despite the reduction, it still remains the second biggest surplus in US history

However, Democrats in Congress are warning that the Bush administration will face difficulties in coming years in paying for expensive new programmes like the National Missile Defence system.

And experts warned that most of the surplus is made up of trust funds that are must be used to pay for future commitments to social security, the US state pension scheme.

Upbeat Adminstration

The Bush administration was keen to stress that even a far lower figure still represented remarkable fiscal health.

"Despite a nearly stagnant economy, the government's finances are remarkably sound," the OMB said.

"The budget's enormous surpluses have allowed us to deliver significant tax relief to working Americans, providing badly needed fiscal stimulus to counteract the year-long slowdown in the economy."

The government is counting on the seven interest rate cuts by the US central bank - the last one only on Tuesday - and early payment of tax cuts to help stimulate the economy and keep consumers spending.

Tough on tax

However, one of the main factors in shrinking the surplus is the 11-year, $1.35 trillion tax cutting programme, introduced by President George W Bush and passed by the Congress earlier this year.

The programme should cost the government some $40bn this year and next.

Future tax breaks would now be limited by budget constraints, the White House said.

"Both this year and next year, the overall budget surpluses are equal to the surpluses generated by Social Security payroll taxes and interest earnings," the statement said.

Funds earmarked for the Social Security programme - and therefore off-limits as regards other government spending - accounted for almost all of the office's forecast surplus for this year.

The fact that the latest forecasts only narrowly skirt the need to dip into Social Security funds has sparked a political row in the US, as Democrats allege the government is planning to rein in welfare spending.

Uneasy outlook

The budget statement was based on gloomier economic assumptions than earlier projections.

The US economy was forecast to grow by 1.7% in this fiscal year, down from the 2.4% increase forecast in February.

This year's unemployment rate forecast was raised to 4.6% from 4.4%.

In 2002, unemployment was projected at an average of 4.8%.

In compensation, inflation was seen as easing, with the consumer price index rising 3.3% this year and 2.7% in 2002.

However, the government is still predicting a sharp recovery of the US economy in 2002, with a growth rate of over 3%.