July 15: Budget Deficit Forecast Grim...‘Light At The End of The Tunnel’

This is a partial transcript of Special Report with Brit Hume, July 15, that has been edited for clarity. Click here to order the complete transcript.

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SEN. KENT CONRAD, D-N.D.: The deficit this year, if you take out Social Security (search) from the calculation, will be the largest we have had since 1983 and the second largest in 57 years.


BRIAN WILSON, GUEST HOST: That was North Dakota Senator Kent Conrad talking about the newly announced $455 billion deficit (search) for fiscal year 2003. But how did we get here? And is a deficit of this size a huge concern?

Joining me to discuss the federal budget deficit is Bill Beach, director of the Center For Data Analysis at the Heritage Foundation.

Thank you for joining us here. Let's talk first…first of all, I think most anybody you talk to in Washington, if we say we have got a deficit, they'll say deficit bad and most people would prefer not to have a deficit.

BILL BEACH, HERITAGE FOUND: I think that is right.

WILSON: That said, though, is this something to be overly concerned about?

BEACH: Well, deficits are evidences of problems. There's no question about that. Either your spending priorities are out of whack and you're spending too much, compared to your revenues. Or you're coming through a period when your revenue is really low. And of course, that is the main reason, Brian; we have these big deficits now.

About 60 percent of the shortfall this year is due to a very slow economy. And it's a slower economy than the OMB, the White House expected in February. And then next year, we have got another battle, 50 percent shortfall is expected to be because of the economy. The rest is we have tax policy in place and we have spending, especially on Iraq.

WILSON: Well, let's talk about some of that spending. I mean, we were doing pretty good up until up about 9-11, weren't we?

BEACH: We were doing pretty good, yes. But we were still in a position where the economy was whacking the budget big time and slowing growth, particularly in upper income taxpayers, where most of the taxes now come from.

WILSON: Yes. So you had that going on. We're on the edge, it's looking iffy, might have a deficit, might not.

BEACH: That's right. Yes.

WILSON: And 9-11 happens, and then we have a war to fight in Afghanistan (search), we have a war to fight in Iraq. We have to…and repair all the damage from 9-11; we have to reorganize the government. Those things are significant contributors to this deficit, are they not?

BEACH: About one out of every four deficit dollars, if I can use that term, coming directly from the war in Iraq and subsequent events to 9-11. So, it worsened the deficit by about 24 percent.


BEACH: And that's going to be a factor next year, the year after that. I mean if the generals are right, and we're going to be there for a while, then we can look at deficits from that source.

But let me just say this. You're coming out of a recession; you're not going into a recession. When recessions are over, unemployment (search) rates get high because people who are discouraged come out of their houses and say to the unemployment officer, I'd like a job. And all of a sudden they're visible to the unemployment that numbers go up.

And we're going to see a better economy in the second half of this year. Everybody expects that, private and public forecasters, too. If we get next year's forecast of 3.8 percent growth on the gross domestic product (search), now that's a technical term, that will be more than twice as much as we're getting right now. And Alan Greenspan (search) is playing along. We have a low dollar, which means our exports are going to be stimulated. So that's good news.

WILSON: So what I'm hearing you say is that while this looks kind of bad news at the moment, there is a light at the end of the tunnel.

BEACH: Yes. It is a light and it is actually not a very small light. We're expecting to see, because of all of those factors, stronger revenue growth. Now let's...

WILSON: Is part of that because of the tax cut?

BEACH: Well, we think so. We think the tax cut was exactly the right time for the tax cut in 2001, 2002 and in 2003. It certainly has softened this recession. The unemployment rates are high, but not by historical standards.

And what's happening right now, businesses are starting to spend again. That was exactly why the tax cuts were put in place, to stimulate spending on the part of businesses. And we've changed the incentives to work and save and invest for all Americans and that's where you get growth. You get growth by changing incentives and making sure investment is not punished.

WILSON: Well, there was quite a debate in this town about whether or not we should go forward with this tax cut. Many people said, oh, this is the wrong thing to do at the wrong time. And others said no, look, if you don't do this, then it's going to be a while before we can dig out of it. You fall into that category?

BEACH: Right. I think I definitely fall under that category. And I'm willing to stand up and say in about six months or eight months from now, if the economy is not performing a lot better than it is now, then the tax cut answer might not have been the right answer at that time.

But it looks to me like all the evidence points to this, that we have in place the right fiscal, monetary and international policies to calm the economy, stimulate the stock market, and bring investment and consumer spending back to where it should be. If I'm right about that, revenue growth this time next year is going to be very strong indeed.

WILSON: You made that case that quarter of all the spending was 9-11 related or the follow-up to 9-11.

BEACH: Right.

WILSON: Many people have pointed out if there were to be another attack and we hadn't spent that money, that the loss to this country, economically, would have been severely much greater.

BEACH: Oh, well, I think that's right. I mean anytime that you hit the infrastructure of an economy, the way it was hit on 9-11; you're going to see a substantial economic reaction.

But I think we have another sort of hit coming up that I'm very worried about.

WILSON: Tell us about it.

BEACH: And that's the spending explosion on Capitol Hill and frankly, at the White House. There are proposals right now that, if enacted, and I'm talking about particularly the Medicare (search) drug benefit, as is currently going through the Senate and the House, which could really increase spending after 2006.

Now I'll tell you that may seem a long time off. If I'm in the stock market, I'm looking into the future and I'm starting to either say it's a good time in the future or a bad time, if the federal government looks like it has itself house out of orders, big time, I may pull back my investments and say let's put it in bonds, let's put it in a foreign country. I'm worried about that not to the point of saying the economy is going to be hurt, but that's a shadow on the horizon.

WILSON: Bill Beach, thank you so much for joining us. We appreciate it.

BEACH: Thank you.

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