CBO: Budget deficits likely to mount

As the U.S. government embarks on a financial-rescue mission - whose cost is impossible to predict - the nation is already headed for a sustained period of budget deficits on a scale never seen before, said Peter R. Orszag, director of the Congressional Budget Office.

Mr. Orszag recently outlined a scenario in which $7 trillion in cumulative deficits could be piled up over the next 10 years.

The so-called “on-budget deficits,” which exclude Social Security surpluses, would exceed $9 trillion over the next 10 years, CBO data reveal.

Under the plausible fiscal-policy scenarios detailed in CBO’s latest “Budget and Economic Outlook,” which was released earlier this month, the budget deficits for 2017 and 2018 could exceed $1 trillion each year.

Trillion-dollar deficits would be arriving just as the cash-flow surpluses from Social Security turn into cash-flow deficits, a development that would require the federal government to use general revenues to meet Social Security benefit payments.

If the projections hold true, these deficits would become the primary force that would add $10 trillion to the national debt, more than doubling it by 2018.

“Unfortunately, that’s the good news,” Mr. Orszag said, “because thereafter we start to experience the longer-term budget pressures that are at the heart of the long-term fiscal problems the nation faces.”

David M. Walker, the former comptroller general of the United States, said, “It is very possible that the numbers could be worse” than the 10-year, $7 trillion deficit projected by the CBO director. Mr. Walker, who, as head of the Government Accountability Office, conducted a nationwide Fiscal Wake-Up Tour chronicled in the documentary “I.O.U.S.A,” recently became president and CEO of the Peter G. Peterson Foundation, which was established to alert Americans about the forthcoming fiscal crisis.

The impact of $700 billion deficits

If the deficits unfold as Mr. Orszag projects, “it would clearly have an adverse long-term effect on our economic position, but the scarier thing is that it is just the beginning. Baby boomers don’t begin retiring in big numbers until after 2018, when a fiscal tsunami could swamp our country,” Mr. Walker said.

It is worth noting that none of these figures includes a dime of costs that the taxpayer might be forced to bear after the government’s recent takeover of mortgage-financing giants Fannie Mae and the Federal Home Loan Mortgage Corp. (Freddie Mac) and other bailouts.

Mr. Orszag estimated deficits averaging $700 billion per year would “hover” in the 4 percent to 5 percent range of gross domestic product (GDP).

Except during the 1940s, when budget deficits during World War II averaged 22 percent of GDP, the 1980s was the only decade since the beginning of the 20th century when deficits averaged more than 4 percent of GDP. According to a study by Lawrence H. Summers, the Harvard economist who served as Secretary of the Treasury under President Clinton, real (inflation-adjusted) interest rates for short-term business loans averaged 4.1 percent during the 1980s, a level higher than any other decade since 1900.

In the near term, the U.S. budget deficit will likely exceed half a trillion dollars for the first time ever in fiscal 2009, which begins Oct. 1, Mr. Orszag said. That’s more than three times the $162 billion budget deficit for 2007.

Compared with the $236 billion surplus in 2000, America’s annual fiscal situation will have deteriorated by three-quarters of a trillion dollars in 2009.

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