- The Washington Times - Wednesday, September 24, 2008

Sen. Barack Obama said the economic crisis and $700 billion government bailout may force him to delay his campaign promises, but pledged nothing would stop him from offering a middle-class tax cut.

With budget experts estimating next year’s federal budget deficit could top $1 trillion, Mr. Obama acknowledged some of his big-ticket proposals - from universal health care to making college affordable - may not become reality right away if the economy continues to sag.

“Does that mean I can do everything that I’ve called for in this campaign right away? Probably not. I think we’re going to have to phase it in,” Mr. Obama said in an interview for NBC’s “Today Show” taped Monday. “And a lot of it’s going to depend on what our tax revenues look like.”

The Democratic nominee insists his plans are already paid for with spending cuts, ending tax breaks for corporations that ship jobs overseas and withdrawing troops from Iraq. But he also told reporters Tuesday he is unsure what the nation’s fiscal outlook would be if he takes the oath of office in January.

Later Tuesday, Republican nominee Sen. John McCain did not directly respond to queries from reporters about the faltering economy’s potential impact on his plans.

“The way out of this is to grow our economy, cut spending, keep taxes low, make sure that there are incentives in place for jobs and businesses to grow and flourish,” he said. “We need to grow the economy. And we can grow the economy, I believe, by keeping people’s taxes low and stimulating businesses and economic growth, and at the same time restrain the growth of spending, which I have fought for for years and have been successful in some areas.”

The Committee for a Responsible Federal Government, a bipartisan nonprofit group, estimated that the promises from both candidates would add substantially to the budget deficit.

According to the group’s report issued this month, Mr. McCain’s plans would add between $291 billion and $304 billion to the deficit by 2013. Mr. Obama’s plans would add $139 billion to the deficit. A large portion of the McCain total is attributed to extending the Bush tax cuts, which are set to expire next year.

A hypothetical President Obama or President McCain would need to face the inevitable ballooning deficit, which experts said will likely exceed $1 trillion next year if the Bush administration’s $700 billion Wall Street bailout earns congressional approval.

To date, the U.S. government has never run an annual budget deficit as high as $500 billion.

In the NBC interview, Mr. Obama said it will take time to assess how the bailout would affect his policy proposals.

“Although we are potentially providing $700 billion in available money to the Treasury, we don’t anticipate that all that money gets spent right away and we don’t anticipate that all that money is lost. How we’re going to structure that in budget terms still has to be decided,” the Illinois senator said.

Mr. Obama told reporters Tuesday his middle-class tax cuts are “absolutely necessary to strengthen an economy that is going to be sliding, probably, into a deeper recession.”

He also said the economic situation makes his health care plans even more relevant to struggling families.

“I think the middle-class tax cut … 95 percent of Americans getting a tax cut is something that still makes sense in this kind of environment,” he said at a news conference in Florida, where he is preparing for his first debate with his Republican rival.

Even before the financial bailout was suggested last weekend, the nonpartisan Congressional Budget Office estimated that the red ink would reach $438 billion in fiscal year 2009, which begins Oct. 1. Add in the extension of some popular tax breaks, which Congress is expected to pass, and the deficit balloons to $540 billion, nearly $130 billion more than the previous record.

No one expects all of the $700 billion to be spent right away. But Stan Collender, a budget expert at Qorvis Communications, said the bulk of the money will likely be doled out in the first year. “My guess is that Treasury will want to move very quickly,” Mr. Collender said.

Under the reasonable assumption that Treasury spends at least $500 billion buying up the “toxic” securities over the next 12 months, the 2009 deficit would top $1 trillion. “And that assumes no stimulus spending or any other Democratic add-ons,” Mr. Collender added.

Budget experts stress that nobody knows how much the bailout will ultimately cost taxpayers because nobody knows what prices the government will pay for the asset-backed securities or what prices they might fetch when they are resold.

Treasury officials assert that the bottom-line cost will be far less than the initial outlay because much if not most of that expense will be returned to federal coffers by the eventual sale to the public of those assets.

But some economists say that the ultimate cost to the taxpayers could be higher than $700 billion.

“I expect that [Treasury] Secretary [Henry] Paulson or his successor will, if Congress grants the $700 billion request, be back for more before long,” said Willem Buiter, a professor at the London School of Economics, who advises governments and central banks.

The next request will “probably [be] at least another $700 billion, as it is unlikely that a crisis of the magnitude we are witnessing will be resolved without the taxpayer coughing up at least 10 percent of annual [gross domestic product].”

Ken Rogoff, a Harvard academic and former chief economist at the International Monetary Fund, said it is unimaginable that the eventual cost to the government would be less than 6 percent to 7 percent of GDP, which would put the taxpayer on the hook in the range of $870 billion to $1 trillion-plus.

Nouriel Roubini, a New York University economist who was years ahead of others in predicting the current market turmoil, projected in August that “this financial crisis will imply credit losses of at least $1 trillion and more likely $2 trillion.” So far, banks have taken $500 billion in write-offs, leaving as much as $1.5 trillion more to be absorbed by taxpayers.


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