Budget office forecasts long recession

Pegs '09 deficit at $1.2 trillion

By David M. Dickson (Contact) | Thursday, January 8, 2009

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Even by Washington standards, the deterioration in the federal government's budget situation since September has been breathtaking.

The Congressional Budget Office projected Wednesday that the budget deficit for the current fiscal year would total $1.2 trillion. CBO's forecast does not include President-elect Barack Obama's two-year economic-stimulus bill, which is expected to cost $800 billion or more.

The CBO report also predicted "a marked contraction in the U.S. economy" in 2009. The gross domestic product (GDP) is expected to fall by 2.2 percent this year, steeper than in any year since 1946, when America was demobilizing from World War II.

"CBO anticipates that the current recession, which started in December 2007, will last until the second half of 2009, making it the longest recession since World War II," the report said. "It could also be the deepest recession during the postwar period."

The unemployment rate, which was 6.7 percent in November, is expected to average 8.3 percent in 2009. The jobless rate will average 9 percent in 2010, when the economy will slowly recover, CBO projected. CBO expects the unemployment rate to peak at 9.2 percent in early 2010.

A major factor affecting the slow recovery will be muted consumer spending "as households continue to adjust to the large declines in net wealth of the past few years," the report said.

CBO also estimated that the national average price of a home will plunge by an additional 14 percent by the second quarter of 2010. "Foreclosure rates are likely to remain high while house prices continue to fall," the report predicted.

"Things are deteriorating extremely fast at the moment," said Nigel Gault, chief economist at IHS/Global Insight. "CBO is telling the incoming Obama administration that the long-term budget outlook is much worse than previously thought."

After the economy begins to recover, the deficits could be problematic.

"The deficit numbers are staggering," said Maya MacGuineas, president of the Committee for a Responsible Federal Budget, a bipartisan budget-watchdog group. "Long-term deficits can undermine the economic recovery because borrowing so much money can push up interest rates," she said. Higher interest rates could stifle business investment and choke off recovery in interest-sensitive industries like housing and autos.

CBO's economic forecast reflects "the magnitude of the depths of our economic situation," said Stan Collender, a longtime budget analyst who is managing director at Qorvis Communications. "CBO's budget forecast clearly demonstrates that there is a worst-case scenario. It can't get much worse. The budget outlook is a lot bleaker than anybody dared imagine before now."

Diane Lim Rogers, chief economist for the Concord Coalition, a nonpartisan organization advocating responsible fiscal policy, expressed concern over "the dramatically bad effect of a bad economy on tax revenues."

CBO reduced its estimate for total tax revenues over the next 10 years by more than $2 trillion since its last budget outlook was issued in September, Ms. Rogers noted. The revenue projections were "very distressing and disturbing because they are based on CBO's forecast beyond the recession, which includes a recovery," she said. CBO expects the next expansion to last at least 10 years.

Budget experts hope Mr. Obama will address the long-term budget problems in the economic speech he is to deliver Thursday at George Mason University in Fairfax.

"Obama has been dealt a bad hand, but the time for leadership is now," said David Walker, former head of the Government Accountability Office who now is president and chief executive of the Peter G. Peterson Foundation.

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