The nonpartisan Congressional Budget Office said a shrinking surplus that will force the government to draw $9 billion from Social Security reserves to make ends meet is mainly due to the 10-year, $1.35 trillion tax cut and the sluggish economy.
The report, which projects growth next year at 2.6 percent, differs from last week's sunnier White House forecast, which predicted 3.2 percent growth. Bush also said last week the Social Security fund should not be tapped unless the nation was at war or in a recession.
Democrats are already calling on President Bush to adjust his budget request.
"This is happening much faster than even we thought it would happen, and it is a failure of the president's budget," said House Minority Leader Dick Gephardt, D-Mo.
Yet Republicans say the tax cut, particularly the $40 billion in tax refund checks that have already started hitting mailboxes nationwide, is just the medicine needed for the economy's ills and that key spending priorities can still be met, albeit at lower levels than Democrats want.
"Democrats may be kicking and screaming because tax cuts took away their spending money, but Americans are laughing all the way to the bank," said House Budget Committee Chairman Jim Nussle, R-Iowa.
CBO analysts say the economy should narrowly avoid a recession. The report, however, could severely crimp the ability of the president and Congress to fund their priorities: increasing defense and education spending, providing a Medicare prescription drug benefit, paying for a new farm subsidy program and extending expiring tax breaks.
The CBO now projects the total budget surplus for the fiscal year that ends Sept. 30 at $153 billion — $162 billion from Social Security, minus the $9 billion needed to balance the books.
The surplus is down $122 billion from the CBO's May estimate but still an enormous amount. The first installment of Bush's tax cut accounted for two-thirds of the reduction, with most of the rest due to dwindling tax revenues from the slowing economy.
The CBO predicts the government will return to a small non-Social Security surplus of $2 billion in fiscal 2002, even assuming somewhat higher spending next year compared with 2001. But the office projects the government will use $18 billion out of the retirement program in 2003 and $3 billion in 2004 as more of the tax cuts kick in.
Over the next 10 years, the CBO is forecasting a $3.4 trillion surplus, including Social Security, down from $5.6 trillion in its May forecast. The tax cut and the associated changes in interest costs account for more than $1.7 trillion of the surplus reduction.
The White House Office of Management and Budget last week also forecasted a shrinking surplus, but it projected a non-Social Security surplus of $1 billion this year and next.
Diverting Social Security money has no practical effect on the program, although it does prevent the government from paying down public debt as quickly as it otherwise would. Making Social Security exempt from such invasions has become a political priority as Republicans and Democrats sought recognition as its greatest protector.
White House budget director Mitch Daniels portrayed the differences as relatively tiny and said the Social Security pledge was "symbolic." He said it would be "a big mistake" to make Social Security so sacrosanct that other priorities are discarded.
"These are reasonably small differences when you take everything into account," Daniels said.
The Bush administration last week forecasted a surplus of $158 billion this year, $173 billion next year and $3.1 trillion over the next 10 years. Over the decade, the White House figured defense spending at $198 billion above the numbers used by the CBO, and Medicare spending $37 billion higher.
The White House used a Social Security accounting change and a few other assumptions to claim that Social Security would remain untouched this year; the CBO did not use those same assumptions.
The Associated Press contributed to this report.