Obama Predicts Years of Deficits Over $1 Trillion
Wednesday, January 7, 2009
Slowing tax revenues and a historic bailout of the U.S. financial system will send the budget deficit soaring toward $1 trillion this year, President-elect Barack Obama said yesterday, and the red ink stands to get substantially deeper if Obama wins approval of a massive economic stimulus plan.
Even if the package of spending and tax cuts helps restore the nation's immediate economic health, Obama said, the government is likely to be left with "trillion-dollar deficits for years to come" unless policymakers "make a change in the way that Washington does business."
"We're going to have to stop talking about budget reform. We're going to have to totally embrace it. It's an absolute necessity," the president-elect told reporters a day before the Congressional Budget Office is set to release its outlook for the coming year.
Obama faces the twin challenges of managing the deficit, the annual gap between tax revenues and spending, and the swelling national debt, the amount of money that the government has borrowed to finance years of deficits. His task is made all the more difficult because new spending is widely viewed as the best way to pull the nation out of the recession. While Obama has declined to say how he intends to deal with such challenges, an economic adviser said yesterday that the president-elect plans to unveil "major initiatives" designed to eventually bring the deficit under control as part of his first budget proposal, which he will submit to Congress next month.
Obama also has scheduled a news conference for today to make a "personnel announcement" related to budget reform, aides said.
In the meantime, Obama said he will incorporate a trio of provisions in the nearly $800 billion stimulus package under review by Congress -- dubbed the American Recovery and Reinvestment Act -- to ensure that the money is not wasted. The provisions include establishing a special panel to monitor use of the money; a Web site that will allow taxpayers to monitor use of the money; and a ban on lawmakers' pet projects, known as earmarks.
"We're going to be investing an extraordinary amount of money to jump-start our economy, save or create 3 million new jobs, mostly in the private sector, and lay a solid foundation for future growth. But we're not going to be able to expect the American people to support this critical effort unless we take extraordinary steps to ensure that the investments are made wisely and managed well," Obama said after an hour-long meeting with his economic team.
Today's CBO report will provide the first official estimate of how Washington's various economic salvage operations have affected the nation's finances. One of the primary participants in yesterday's meeting was Peter Orszag, who stepped down as CBO director in November to serve as Obama's budget chief. Orszag should be intimately familiar with the forthcoming CBO report; Obama said Orszag advised him of the grim deficit forecast.
In announcing the news a day early, Obama cast himself as the unfortunate heir to President Bush's fiscal "irresponsibility," saying Bush's policies have doubled the national debt over the past eight years and delivered "the worst economic crisis that we've seen since the Great Depression." Though Obama plans to keep some of Bush's most expensive policies -- including many of the tax cuts enacted during Bush's first term in office -- Obama has vowed to scour the budget for wasteful spending.
"We are going to bring a long-overdue sense of responsibility and accountability to Washington," Obama said. "We are going to stop talking about government reform, and we're actually going to start executing."
Bush's tax cuts helped eliminate the surpluses of the Clinton years and helped drive the annual budget deficit to a record $413 billion in 2004. The deficit later plummeted to $162 billion in 2007 but soared to $455 billion in the fiscal year that ended in September, largely because of a small stimulus package enacted last February, slowing tax revenues and rising expenses in Iraq and Afghanistan.
Initial projections suggested that the deficit for the fiscal year that began Oct. 1 would be about $550 billion. But since then, the budget outlook has only gotten bleaker.
As the economy has weakened, tax collections have slowed, and spending on food stamps and unemployment benefits have increased. Meanwhile, Congress approved a $700 billion bailout to stabilize fragile financial markets by purchasing the stock and assets of banks, insurance companies and other institutions. Though much of that money is invested in assets that eventually will be sold, returning at least some of the money to the government, the bailout is likely to add another $200 billion to the deficit this year, according to a letter CBO analysts sent last month to House Majority Leader Steny H. Hoyer (D-Md.).
Those developments alone are pushing this year's deficit toward $1 trillion, said an Obama economic adviser. If approved, Obama's stimulus package would clearly add hundreds of billions of dollars to the deficit in 2009, the adviser said.
Even if only half the stimulus money is spent this year, the deficit could easily top $1.4 trillion, or nearly 10 percent of the economy -- a budget hole not seen since the end of World War II. Many Wall Street analysts expect the deficit to go higher, however; a recent Treasury survey found that major bond dealers expect the nation to borrow as much as $2 trillion by the end of September.
The mounting debt has raised an alarm on Capitol Hill, where some Republicans and moderate Democrats are pressing Obama to tackle the looming challenge of skyrocketing Medicare and Social Security spending, and to adopt tough new budget rules to prevent future deficits from ballooning.
Congressional aides said one possibility would be a return to the stringent budget rules of the late-1980s, when overspending automatically triggered across-the-board cuts to federal programs, a process known as "sequestering."
Hoyer, a champion of fiscally conservative Democrats in the House, acknowledged that sequestering is an option. But it's "not something lawmakers are eager to approve," he said, because it would take control over federal spending out of the hands of Congress.