The recession will add about $50 billion to the federal budget deficit for the current fiscal year, bringing the gap between tax revenue and spending to between $300 billion and $325 billion, according to the latest administration figures.
The new estimate excludes as much as $30 billion in additional money that will probably be needed to pay for U.S. troops in the Persian Gulf, even without the huge costs of a war. In addition, the deficit would be $66 billion greater but for this year's surplus in the Social Security program. Taking these figures into account, the government's operating deficit could exceed $400 billion.
That would be the biggest deficit in U.S. history, overwhelming the politically painful measures Congress and the administration adopted in last year's contentious battle to reduce the deficit.
"It is going to face Congress with a very difficult situation with the American people, who will be shaken in their faith in Congress," said Robert Reischauer, director of the Congressional Budget Office. "Congress just enacted the largest deficit reduction package in the nation's history and now we will be treated to the largest deficit in the nation's history."
Other economists said the massive deficit also could complicate the Federal Reserve's efforts to stimulate the economy. The weakening economy puts pressure on the Fed to cut interest rates, but the central bank must keep rates high enough to attract the foreign investment needed to help finance the deficit.
The new deficit estimates will appear on Feb. 4 in the Bush administration's budget proposal for fiscal year 1992. The Congressional Budget Office will also issue new estimates that are expected to be similar to the administration's.
A substantial deficit was a certainty this year because last year's budget pact stopped short of enacting the steps necessary to balance the budget. But the recession has made the situation more dire by reducing tax receipts. Both personal and corporate income will be lower as a result of the recession that began around the time Congress and the Bush administration were finishing the five-year, $493 billion deficit reduction package last October.
In addition, certain spending programs are running higher than expected, according to Reischauer. Several of these programs -- such as Aid to Families With Dependent Children, food stamps and Medicaid -- cost more when the economy is weak. In addition, the cost of Medicare, already the fastest growing item in government spending, is running higher than expected.
The increase in deficit estimates by itself will not necessarily cause the budget accord to unravel. The new strategy for enforcing the agreement focuses on spending limits, not deficit reduction goals. But the growing deficit comes at a time when Congress and Cabinet secretaries are already chafing under the spending restrictions that are part of the deficit reduction package.
Lawmakers say that in the November elections, voters were sending them a message to keep down taxes. Some members of Congress also say the government should increase spending to help pull the economy out of its slump.
Congressional opponents of the spending limits could rally around an escape clause in the budget accord that permits enforcement to be postponed if there are two consecutive quarters of economic contraction.
That opportunity should arise by April, but it is considered highly unlikely that President Bush would agree to delay enforcement of the accord. Moreover, the congressional leadership, both Democratic and Republican, is urging members to stand by the agreement. But at a meeting of freshman members of Congress in Williamsburg over the weekend, several lawmakers expressed frustration about not being able to do more about taxes and spending.
Within the administration, several Cabinet secretaries loudly protested against spending limits. Health and Human Services Secretary Louis Sullivan released a letter predicting that harm would be done by spending limits proposed by the Office of Management and Budget, thus angering OMB Director Richard G. Darman. Such negotiations within the administration are usually done in private.
Sullivan's department eventually received a little less than $200 million in additional funds, but that led to further cuts in other areas.
One administration source said some departments suspected that OMB has set aside a "honey pot" of money to be used in negotiating with Cabinet secretaries, but OMB said there was no extra money.
The administration probably will not make a request for new money for U.S. troops in the gulf until February, sources inside and close to the administration said. In part, that is because in order to get the new budget proposals to the printer on time, the OMB must make its numbers definite by Jan. 15 -- the same deadline the United Nations resolution sets for Iraq to withdraw from Kuwait.