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Ballooning Deficit Could Temper Support for Obama's Spending Plans

Spratt said he got "sticker shock" when he opened yesterday's CBO report.

The picture it paints is bleak: The CBO predicts that the recession that began in December 2007 will extend well into this year, driving unemployment to more than 9 percent by early 2010. (The unemployment rate is currently 6.7 percent.) Plummeting home prices, which touched off the panic in financial markets last year, are likely to fall another 14 percent by 2010, and foreclosure rates are likely to remain high. As a result, federal tax collections are expected to drop by $166 billion this year.

Government spending, meanwhile, is expected to skyrocket to nearly 25 percent of the economy, the report says, "a level exceeded only during the later years of World War II." One of the biggest expenses will be the estimated $240 billion to incorporate mortgage-finance giants Fannie Mae and Freddie Mac into the federal budget. The twin firms were taken over by the government in September.

Another huge expense is the financial system rescue that Congress approved in October. Though the government expects to spend $700 billion to buy the stock and assets of banks and other troubled financial institutions, the CBO estimates that most of the money will be recovered when those assets are sold and so is charging only $180 billion against the budget deficit.

Those costs, combined with falling tax collections, are expected to drive the deficit to $1.2 trillion this year, or 8.3 percent of the overall economy -- the largest budget gap as a percentage of gross domestic product since 1945. Next year's deficit is projected to drop to 4.9 percent of the economy, or $703 billion.

Both figures substantially understate the problem, however. If Congress approves Obama's request for nearly $800 billion in spending and tax cuts, this year's deficit could easily soar to $1.6 trillion.

Staff writer William Branigin contributed to this report.


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