Correction to This Article
Earlier versions of this article said the deficit for this year would be $490 billion. That is the estimated deficit for the next fiscal year. This article has been corrected.
Record $482 Billion '09 Deficit Forecast
Next President's Options May Be Limited

By Jonathan Weisman
Washington Post Staff Writer
Tuesday, July 29, 2008

The federal budget deficit will grow to a record $482 billion in the fiscal year that begins in October, the White House said yesterday, driven by war costs, tax rebates, and a slowing economy that will leave the next president little room to fulfill costly campaign promises.

White House budget director Jim Nussle said unexpectedly slow economic growth, sharp declines in housing prices and an unanticipated increase in inflation will help drive next year's tide of red ink close to half a trillion dollars, up sharply from February's $407 billion estimate.

"We are not happy about the deficit," Nussle conceded.

After three successive years of decline, this year's explosion of red ink is likely to scramble the plans of the next president, regardless of whether Republican John McCain or Democrat Barack Obama prevails. Each candidate has pledged hundreds of billions of dollars in new tax cuts or new spending. And the winner in November will inherit a government deeply in debt, with the cost of

the baby-boom retirement looming large in the near future.

"This is going to make it extraordinarily difficult for whoever's going to become president," said Senate Budget Committee Chairman Kent Conrad (D-N.D.). "I don't care who the president is -- when they come in and meet with their secretary of the Treasury, the Federal Reserve chairman, their top economists, it will be a sobering moment."

In February, President Bush projected a huge deficit increase, to $410 billion, for the fiscal year that ends Sept. 30, anticipating passage of his war funding request and a generous package of tax rebates to stimulate the economy. The White House yesterday adjusted that forecast downward slightly, to $389 billion, still up sharply from the $162 billion deficit recorded last year. The deficit was $248 billion in fiscal 2006 and $318 billion in fiscal 2005.

Bush had expected the impact of the tax rebates and war funding to begin subsiding in 2009, reducing the deficit by $3 billion. Instead, Nussle said, the slowing economy will push the deficit to a level that would easily beat the record $413 billion deficit of fiscal 2004.

If anything, the White House's new deficit forecasts may be low. This year's deficit does not include the costs of the massive housing bill Congress approved last weekend, nor does it reflect the new law reversing scheduled cuts in Medicare reimbursements to doctors.

Next year's record figure includes only $70 billion for the wars in Iraq and Afghanistan, which could cost three times that much, and it is based on economic assumptions that could prove unrealistic. The White House is assuming economic growth next year of 2.2 percent, down sharply from the 3 percent estimate of February but still brighter than the 1.7 percent growth estimate of many private-sector economists. The White House is also assuming rosier numbers for inflation and unemployment rates.

"That's not the real number," former Bush Treasury secretary Paul H. O'Neill said of the $482 billion deficit forecast. "It's upward of $500 billion and counting. It's a mind-boggling number."

Measured against the size of the economy, next year's mark, at 3.3 percent of the gross domestic product, is still eclipsed by the deficits of Bush's first term, as well as the deficits of George H.W. Bush and Ronald Reagan.

Neither McCain nor Obama has been particularly mindful of the budget deficit. McCain has proposed to extend all of Bush's first-term tax cuts, which expire in 2011, and add hundreds of billions more, mostly for business. The nonpartisan Tax Policy Center, run jointly by the Urban Institute and the Brookings Institution, estimates the cost of McCain's tax policies at $3.6 trillion over the next decade.

Obama's own proposals -- to extend Bush's tax cuts for taxpayers earning less than $250,000 and to cut other taxes for the working poor and middle class -- would cost $2.7 trillion over 10 years, the Tax Policy Center said. Obama would spend an additional $130 billion a year on health care, renewable energy, education, infrastructure and other programs.

Obama economic adviser Jason Furman said yesterday that all those costs would be more than offset by savings from ending the war in Iraq, by repealing some of Bush's tax cuts, and by slicing subsidies for high-income farmers, private insurers in Medicare and banks in the student loan program, among other cuts.

He insisted that yesterday's new deficit figures would not affect Obama's campaign promises.

"He absolutely not only can do what he's promised to do, but must do what he's promised to do," Furman said.

Budget analysts and economists were skeptical.

The new numbers "are going to constrain what either of them can do, both in terms of spending and in terms of tax cuts. At least I hope that's the case," said Leonard E. Burman, director of the Tax Policy Center and a former Treasury official. "We know we're leaving our children all these unfunded liabilities. Piling on hundreds of billions in additional deficits just seems grossly irresponsible."

Both presidential candidates used the new budget forecasts to bash Bush's fiscal legacy, with McCain taking the biggest swing. The presumptive Republican nominee called the 2009 deficit "a sad legacy."

"There is no more striking reminder of the need to reverse the profligate spending that has characterized this administration's fiscal policy," he said.

But neither candidate seemed eager to shift gears. Harvard University economist Martin Feldstein, a McCain adviser, said the surge of red ink is tied to cyclical developments -- the economic stimulus checks and the slowing economy -- and not permanent changes.

"So I don't think it has implications going forward," he said.

Obama met in Washington with an all-star cast of economic advisers and experts, including O'Neill, billionaire investor Warren Buffett, former Bush Securities and Exchange Commission chairman William H. Donaldson, former Federal Reserve chairman Paul A. Volcker, Google chief executive Eric E. Schmidt, and Robert E. Rubin and Lawrence H. Summers, who were Treasury secretaries under President Bill Clinton. All have endorsed Obama except O'Neill, who said he remains neutral in the presidential race.

Afterward, Obama advisers made it clear they see the need now to rescue the economy, with new spending and tax cuts, as separate from the long-term issue of the national debt.

"Of course fiscal rectitude was on the table," said Jared Bernstein, a senior economist at the liberal Economic Policy Institute, who was at the meeting. "But the key word with Barack Obama is 'balance.' "

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