Budget estimates released Wednesday showed some improvement in the deficit but gave little solace to Democrats struggling to match President Bush's promise to balance the budget.
The new forecast from the Congressional Budget Office put the deficit for the current budget year reaching about $200 billion after factoring in Iraq war costs. Last year's deficit was $248 billion.
Both the White House and the top Democratic budget writers welcomed the improved outlook, but difficult disagreements remain over how to close the gap.
The CBO, a nonpartisan agency that provides lawmakers with estimates of the budget and the costs of legislation, said the budget could run a $170 billion surplus in the 2012 fiscal year.
That figure, however, assumes Congress will let Bush's tax cuts expire at the end of 2010, effectively raising taxes on income, inheritances, married couples and parents.
The Bush administration releases its budget Feb. 5 and promises it will be balanced by 2012 without any such tax increases.
White House budget director Rob Portman met on Capitol Hill with a group of moderate House Democrats and claimed such lawmakers as allies in the president's effort.
"This notion that you have to raise taxes to achieve balance ... is no longer the environment or the scenario," Portman told reporters.
He said Bush's budget would achieve balance with improved but still "cautious" estimates of tax revenues. They probably will be more optimistic than the CBO's estimates.
Bush has one significant advantage in the upcoming debate. In designing his budget, Bush can assume his changes are put in place. He does not have to consider the political difficulties of getting the Democrat-controlled Congress to go along with cuts to hospitals and other Medicare providers and new fees on airline passengers and veterans seeking health care.
The chairman of the House Budget Committee, Rep. John Spratt, D-S.C., and his Senate counterpart, Sen. Kent Conrad, D-N.D., have the difficult job of trying to advance a budget that unites politically fractious factions of their party.
Their task is made even tougher because the CBO's figures understate the true magnitude of the nation's fiscal woes.
Not included, for example, are the future costs of modifying the alternative minimum tax to head off a revolt by middle-class taxpayers.
Extending Bush's tax cuts and changing this tax would swamp the projected surplus for 2012 with $425 billion in lost revenues and interest costs, according to CBO figures.
Surplus or deficit
Spratt and Conrad say factoring in such costs presents a truer picture of the 2012 deficit at $313 billion. That would guarantee wrenching choices for lawmakers promising to erase the deficit.
The CBO's new projections credit revenue increases and lower costs for federal health care programs for the bulk of the improvements to this year's deficit.
Just last July, the White House predicted a $339 billion deficit for 2007. The CBO's new director, Peter Orszag, based his $200 billion prediction by combining the agency's baseline deficit of $172 billion with about $25 billion in additional war spending.
Bush is expected to send Congress a Pentagon request for about $100 billion for Iraq and Afghanistan, but only $25 billion or so will actually be spent before the Sept. 30 end of the current budget year, Orszag said.
Like virtually all of his predecessors, Orszag sees troubling signs in the long term. Rising health care costs and the looming retirement of the baby boom generation promise to swamp the Medicare program unless Congress steps in with politically painful tax increases and or benefit cuts.
"Some combination of either spending reductions, revenue increases or a combination of the two will be necessary to bring the nation's long-term fiscal house in order," Orszag said.