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Thursday, 29 November, 2001, 09:50 GMT
US budget surplus disappears
The US budget surplus looks set to disappear for the next few years - just months after a huge budget surplus was projected.

The head of the White House Office of Management and Budget, Mitch Daniels, said that the recession and the need for more tax cuts meant that the Federal government would run a deficit until 2005.

"It is regrettably my conclusion that we are unlikely to return to balance in the federal accounts before possibly the fiscal year 2005," he said.

The news will make it more difficult for the Congress to reach a deal with the White House over the size and scope of the stimulus package that Mr Bush proposed after the terrorist attacks on 11 September.

This financial year the US government had a surplus of $127bn, the second largest ever - prompting Congress to push for increased spending as well as tax cuts.

In August, the Congressional Budget Office forecast a surplus of $172bn and $201bn in the following two years.

But the sharp economic downturn, reduced tax revenues, and the need for more spending meant that the surplus could not be sustained.

Sensitive negotiations

The creation of a budget surplus was the result of a long struggle between the White House and Congress that began during the Clinton years.

In the end, the Republican ideal of "small government" and tying Washington's hands won out, with both sides backing the principle.

But the forecasts of a huge surplus led Congress in March to pass a ten-year, $1.35 trillion tax cut package at the behest of the Bush administration.

Now, in the wake of the attacks, a sea change in attitudes means that government is suddenly seen as having a role after all - although its magnitude and nature is still the subject of fierce debate.

Democrats and Republicans are squabbling over whether extra spending, more tax cuts, or paying down the national debt should have priority.

Mr Daniels said that it would be decisions on spending over the next year "that will determine whether we ever see another surplus."

But Kent Conrad, the Democratic chairman of the Senate Budget Committee, said:
"I agree with his analysis that we will be running deficits for those years, but he left out the biggest reason, which is the tax cut."

The tax cut was passed when the Senate was still in Republican hands, before the defection of a Vermont Senator gave it a Democratic majority.

Social security surplus

The news means that the government may have to use part of the surplus on its social security funds to pay for its operations - something it had previously agreed not to do.

Meanwhile, the Senate and House of Representatives are at odds over a recovery package.

The Republican-controlled House has passed a $100bn tax cut package largely aimed at large corporations, but the Democrats want a $73bn measure which includes help for the low-paid and unemployed.

Recent negotiations between Democrat and Republican Senators appear to have narrowed the gap between them.

The US Treasury Secretary, Paul O'Neill, says he wants a deal by Christmas to help counter the deepening US recession.

Terror's impact

Signs of a slowdown

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Key players

See also:

27 Nov 01 | Business
Worse to come for US economy
26 Nov 01 | Business
US officially enters recession
26 Nov 01 | Business
Surprise increase in US sales
20 Nov 01 | Business
Global economy shrinks
18 Nov 01 | Business
US recession raises global fears
26 Oct 01 | Business
US consumers remain wary
26 Sep 01 | Business
US economy in freefall
28 Nov 01 | Business
US slowdown bites into heartlands
28 Nov 01 | Business
Americans poised for tax holiday
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