Costly response to terrorist attacks may turn federal surpluses back into deficits

WASHINGTON (AP) - A potential $100 billion price tag for America's response to terrorism plus a limp economy hobbled further by last week's attacks could revive federal deficits next year for the first time since 1997.

The return of federal red ink would end a string of four straight annual surpluses and mark a stunning turnaround from May, when the Congressional Budget Office envisioned a 2002 surplus of $304 billion. The nonpartisan CBO downgraded its projection to $176 billion last month to account for the costs of President Bush's tax cut and an economy that was already becoming weaker.

The abrupt budgetary reversal has been accompanied by an equally dramatic transformation of the capital's politics.

The partisan duel over leaving Social Security surpluses alone that dominated Washington until the Sept. 11 hijackings and crashes has been silenced. Replacing it is a consensus between Democrats and Republicans that improving national security and taking other steps is far more important.

''We're dealing with a national emergency, and we're going to spend and do what it takes to deal with it in the most effective way,'' House Minority Leader Dick Gephardt, D-Mo., said Thursday. ''We're going to do what we need to do.''

''For the most part, that's suspended, at least for now,'' House Majority Leader Dick Armey, R-Texas, said of lawmakers' concerns about spending down the surplus. He said a re-emergence of deficits, however, would be a problem for many legislators.

Underlining the economy's dire situation, Federal Reserve Chairman Alan Greenspan told lawmakers Thursday that the Sept. 11 assaults had dealt a major blow to the nation's businesses, consumers and financial markets and raised ''the degree of uncertainty about the future.''

But he expressed long-term optimism, saying, ''I am confident that we will recover and prosper as we have in the past.''

Greenspan also warned that plummeting surplus projections could prompt a rise in interest rates, which would drive up businesses' and consumers' borrowing costs and could negate congressional efforts to stimulate the economy with tax cuts or more spending.

''We cannot make a judgment on whether a particular package of stimulus is indeed a stimulus'' until its effect on interest rates is determined, Greenspan said.

No one yet knows how much the government will spend as a result of last week's devastation at the World Trade Center and the Pentagon, which left thousands dead or missing. But informal estimates by Republicans on the Senate Budget Committee illustrate the potential costs and lightning speed with which the government's books could turn upside down.

They guess that besides the $40 billion emergency package Congress enacted last week, there could be roughly $20 billion in aid to the ailing airline industry; an extra $20 billion for the Pentagon; and $20 billion added to next year's routine spending bills for education, agriculture and other increases.

And that excludes a tax-cutting economic stimulus package both parties are discussing that is expected to cost well into the billions of dollars.

In addition, the chilling effects of the terror attacks on the already weak economy leave many economists expecting federal revenue to drop next year by $50 billion to $60 billion. Combine that with the extra spending and tax cuts and last month's projected $176 billion surplus either vanishes or comes close to disappearing.

''It's not unlikely,'' Stanley Collender, who analyzes the budget for the Fleishman Hillard consulting firm, said of a return to federal deficits. ''And I'm not sure it's going to make any difference to anybody.''

Indeed, tax cuts and added spending are what most economists prescribe for a stalled economy.

''Especially when national security is in jeopardy, this is what the budget is for,'' said Jim Glassman, a Chase Securities Inc. economist in New York.

But over the long term, depleting federal surpluses will make it harder for the country to address its future needs, especially the restructuring of Social Security and Medicare so that both massive programs can support the approaching retirement of the baby boom generation.

''I think there's mandate for action but also the right action,'' said Rep. Sander Levin, D-Mich., expressing the need for caution some lawmakers feel. ''I don't think we want to blow holes in the future of this country.''

Meanwhile, with fiscal 2002 starting Oct. 1, congressional leaders said they would approve a temporary measure next week keeping federal agencies functioning through Oct. 16 while lawmakers work on the new year's 13 spending bills.

Congress has yet to complete any of those spending measures, which cover one-third of the federal budget. But the pace has accelerated amid Capitol Hill's new bipartisan spirit since the terrorist strikes.

The two parties were near an agreement to hold overall spending for the 13 bills to close to the $679 billion Bush proposed, including healthy increases for education and defense.

That excludes the emergency $40 billion approved last week. Bush is expected to begin releasing details next week of how some of that money will be spent.


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