- The Washington Times - Tuesday, August 25, 2009

The White House is reducing its forecast of this year’s budget deficit to $1.58 trillion as a result of significantly lower than expected spending on bank bailouts, congressional sources say.

A report due Tuesday from the White House Office of Management and Budget will show that the deficit is lower because of $262 billion less in spending on bank bailouts by the U.S. Treasury and Federal Deposit Insurance Corp. (FDIC) than the administration expected earlier this year, according to a memo written Monday by former Congressional Budget Office Director Douglas Holtz-Eakin that was obtained by The Washington Times.

The administration earlier this year in the midst of the banking crisis expected to spend more than $1 trillion closing some failed banks, bailing out others and helping many financial institutions get rid of toxic loan portfolios.

While the outlook for the deficit in the current fiscal year ending Sept. 30 has improved significantly thanks to reduced spending on banks, it is still on track to rise to a record and to drive unprecedented levels of borrowing by the Treasury in the months ahead.

Spending on bank bailouts slowed abruptly after the Treasury and Federal Reserve announced the results of stress tests on the 19 largest banks in March, providing reassurance to financial markets that the losses those banks were experiencing on mortgages and other loans were manageable. Since that time, major rallies have taken hold in the U.S. stock and credit markets, led by improving sentiment about the stocks and finances of big banks such as JPMorgan Chase & Co. and Bank of America Corp.

The number of bank failures has increased sharply in recent months, but most involve small community banks where the FDIC’s exposure to losses is small compared with the cost of bailouts of big banks, totaling more than $50 billion apiece last winter. The White House now expects the FDIC’s losses from bank closures to be $78 billion lower than previously estimated, said Mr. Holtz-Eakin, who was an economic adviser to Republican presidential candidate John McCain last year.

With the financial outlook improving, particularly for the biggest banks that now receive a variety of federal guarantees on their debts and assets, banks largely have shunned the complicated and expensive loan revival programs that the government set up to help them get through the crisis. That dramatically lowered the bailout costs for the government.

The improvement is only temporary, however, Mr. Holtz-Eakin said in his memo, which was addressed to House Minority Leader John A. Boehner, Ohio Republican. He said the White House forecast will show that the deficit outlook for future years has worsened, with the 10-year deficit forecast surging by nearly $2 trillion to $9 trillion.

“The budget outlook is worse and dangerous,” he said. “The administration’s economic forecast was far too rosy earlier this year,” he said, and the White House is now being forced to lower its projections of economic growth and federal tax revenues to reflect a deeper recession and slower recovery than previously expected.

Because the unemployment rate is higher than the administration previously forecast, the cost of providing unemployment checks and other benefits authorized in the stimulus bill has risen, likely driving up the cost of the stimulus to about $900 billion from $787 billion estimated earlier this year, Mr. Holtz-Eakin said.

Beyond the adjustments needed to reflect the deeper than expected recession, Mr. Holtz-Eakin said, future deficits will be larger than the administration is projecting because revenues that the White House is expecting to raise from allowing tax cuts to expire, closing corporate tax loopholes and raising fees from a regulatory scheme on greenhouse gases likely will not materialize.

The Congressional Budget Office, which also will announce updated deficit figures this week, likely will project even higher deficits than the administration, he said.

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