By Lori Montgomery
Washington Post Staff Writer
Thursday, January 8, 2009
The nation's budget deficit will soar to an unprecedented $1.2 trillion this year, congressional budget analysts said yesterday, a startling tide of red ink that could dampen enthusiasm on Capitol Hill for some of President-elect Barack Obama's most ambitious priorities.
In the first official estimate of the damage done to the nation's finances by a weakening economy and various financial-sector bailouts, the Congressional Budget Office (CBO) reported that the gap between government spending and available revenue will exceed 8 percent of the overall economy by the end of September, a chasm not seen since the end of World War II.
The news drew a grim reaction from Congress, where the chairman of the Senate Budget Committee, Sen. Kent Conrad (D-N.D.), called the figure "jaw-dropping." While lawmakers said they expect to dig this year's hole even deeper by approving a massive stimulus package aimed at pulling the nation out of recession, Conrad and his House counterpart, Rep. John M. Spratt Jr. (D-S.C.), said they have warned Obama to limit the package to temporary measures that will not add to the deficit in future years.
The two Democratic budget leaders also cautioned Obama to find ways to pay for any other initiatives he pursues after taking office later this month, including expensive promises to expand access to health care for the uninsured, develop new sources of alternative energy and offer a bevy of new tax cuts to middle-class families.
"We should be very skeptical about any policy changes that add to the deficit and the debt that are permanent in nature," Conrad said told reporters. "It is a mistake to do things that add to the deficit and debt beyond the period for economic recovery."
At a news conference in Washington, Obama greeted news of the mounting deficit by vowing to ensure that government dollars -- either in the stimulus package or routine programs -- are not wasted. To that end, he announced the appointment of Nancy Killefer, an assistant secretary of the Treasury in the Clinton administration, to serve as "chief performance officer" in the White House budget office. In the newly created post, Killefer will be tasked with retooling budget practices and slashing unnecessary programs.
"In order to make these investments that we need, we'll have to cut the spending that we don't, and I'll be relying on Nancy to help guide that process," Obama said. He said Killefer, a senior director in the Washington office of McKinsey & Co., "is an expert in streamlining processes and wringing out inefficiencies so that taxpayers and consumers get more for their money."
Obama once again declined to say how he plans to eliminate the growing budget gap, which is projected to narrow somewhat as the economy improves but explode again as the retiring baby boom generation sends the cost of the entitlement programs -- Social Security, Medicaid and Medicare -- skyrocketing. Obama said he will offer "very specific outlines" for addressing short- and long-term deficits when he submits his first budget proposal to Congress next month.
"We are beginning consultations with members of Congress around how we expect to approach the deficit," Obama said. "We expect that discussion around entitlements will be a part, a central part, of those plans."
So far, however, Conrad said Obama's team has been cool to requests to establish a bipartisan task force that would reexamine the entitlement programs, as well as the nation's tax system, and develop a long-term plan for bringing costs and revenue in line.
Meanwhile, Spratt said Obama's team is pressing for a new tax cut for working families in the stimulus package that would be made permanent in Obama's first budget.
"I keep telling them to defer judgment: Don't do anything permanent now," Spratt said. Otherwise, "how do you get rid of a deficit of this magnitude?"
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.