As Stimulus Grows, So Does Task of Closing Whopping Deficit

By Lori Montgomery
Washington Post Staff Writer
Saturday, February 14, 2009

Economists may debate whether the $787 billion stimulus bill Congress sent to the president last night is big enough to lift the nation out of recession. But one thing is certain: It will blast another big hole in an already tattered federal budget.

Even before lawmakers began dickering over the massive package of spending and tax cuts -- the biggest dose of economic medicine ever conceived by Washington -- the federal government was headed for a budget deficit of nearly $1.2 trillion, a post-war record. The stimulus package will drive that number to nearly $1.4 trillion this year and to more than $1.1 trillion next year, according to congressional budget analysts, with expensive decisions about housing, health care and the banking system yet to come.

The budget outlook is likely to grow even darker: Liberal Democrats hope to extend big chunks of the stimulus package past their two-year expiration date, making permanent increases in funding for public education and health care for the poor and unemployed. Robert Borosage, a prominent liberal policy analyst, said creating an economy for the 21st century will require "a sustained expansion of public investment."

Meanwhile, President Obama wants to permanently extend a tax credit in the stimulus package for workers that costs at least $66 billion a year. Taken together, those goals would push the price of the stimulus package to around $2.5 trillion over the next 10 years, according to a new estimate from the nonpartisan Congressional Budget Office. Adding interest costs associated with borrowing the money, the tab comes to $3 trillion.

White House officials have pledged to offer a plan to pay for the president's tax cut, as well as any new spending initiatives outside the stimulus package, when they unveil their budget proposal later this month. For now, they said, they are treating the stimulus measure as an extraordinary response to an extraordinary crisis.

"If the question is what comes next, those judgments will be made when these programs expire," said Ken Baer, spokesman for the White House budget office. "At this point, these things are temporary."

Republicans and deficit hawks point out, however, that the most permanent thing in Washington is often a temporary government program. Few ever die. And with Democrats in control of the White House and Congress for the first time in 14 years, few budget analysts believe that lawmakers will trim back such longtime Democratic priorities as Head Start programs, Pell grants and the Earned Income Tax Credit, a tax break for the working poor.

"There are people lining up who will be absolutely outraged if any of these things are pulled back," said Maya MacGuineas, president of the bipartisan Committee for a Responsible Federal Budget. "Many of them will be made permanent, without question."

The issue then becomes how to pay for it. The nation can't sustain trillion-dollar deficits without driving up the debt owed to private investors to dangerous levels that could undermine the nation's global economic dominance. That debt now stands at nearly $6 trillion.

Borosage recommends "progressive tax reform" that raises taxes on the wealthy. But Obama has pledged to cut taxes for most Americans, and other analysts argue that balancing the budget solely with new revenues would require oppressive levels of taxation.

"You can't tax your way out of this," said Brian Riedl, a budget analyst at the conservative Heritage Foundation. "You'd have to raise taxes by $8,500 per household in order to close a trillion-[dollar] deficit through tax increases alone."

Riedl noted that federal spending will rise to more than 26 percent of the nation's overall economy this year, driven by the $700 billion rescue of the U.S. financial system and the government's seizure of mortgage giants Fannie Mae and Freddie Mac, as well as the stimulus package. Tax revenues, meanwhile, are forecast to drop to about 16 percent of the overall economy, in part because the recession is reducing earnings and cutting people's tax bills.

Obama has pledged to close the chronic gap between the government's income and its spending, starting with a summit on fiscal responsibility planned for Feb. 23, the day before he addresses a joint session of Congress. Obama has said he wants to tackle the toughest issues in Washington: making a Byzantine tax code simpler and fairer, reducing the skyrocketing rate of growth in Medicare and Medicaid, and assuring that Social Security will survive for future generations.

White House officials have declined to say exactly what is on the summit agenda. But with the stimulus package out of the way, lawmakers and budget analysts said Obama needs to get specific about how he plans to go about the painful work of bringing taxes and spending back into line.

"They have a few more weeks to get away with all this great talk, but sooner or later there's got to be a real budget," MacGuineas said. "They need to put budget reform on a level playing field with reviving the economy if they're going to be taken seriously."

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