Wednesday, January 7, 2009

The federal budget deficit will hit a record $1.18 trillion this year even before President-elect Barack Obama can spend a dime of taxpayer money to stimulate the economy, the Congressional Budget Office said in a forecast released Wednesday.

The “baseline” projection, which CBO officials hustled to draft as Mr. Obama and Congress prepare to pass a massive stimulus bill, also predicts that the U.S. economy will shrink by 2.2 percent for the fiscal 2009 year, which began October 1, capping what is projected to be the longest economic downturn the country has faced since World War II.

“This is not your regular, run-of-the-mill recession,” said Robert Sunshine, the CBO’s acting director.

While Mr. Obama plans a huge program of tax cuts and spending to revive the country’s economy, the CBO baseline report offers policymakers a snapshot of where the economy is heading if no federal action is taken.

The deficit projection is a whopping $748 billion higher than the CBO’s previous forecast in mid-2008, reflecting plunging federal tax revenues as the economy stalled and the huge hits to the federal treasury from the giant Wall Street bailout plan and the government’s takeover of troubled housing giants Fannie Mae and Freddie Mac.

The nonpartisal budget office said the cumulative federal deficit for the next five years is projected to top $1.9 trillion.

Congressional budget analysts for the first time put a price tag on the Treasury $700 billion financial bailout program approved by Congress in October, estimating the government will take a net hit of $189 billion from the program over the next two fiscal years. The Treasury Department has already spent or pledged about half of the $700 billion fund to bolster banks, financial firms and the Big Three automakers.

The effective takeover last fall of Fannie Mae and Freddie Mac, the government-sponsored housing agencies that lost heavily with the collapse of the subprime mortgage market, will add another $218 billion to the deficit for fiscal 2009.

The new CBO forecast contained a slew of grim numbers for the incoming Obama administration.

The nearly $1.2 trillion federal deficit is equal to 8.3 percent of U.S. GDP, the highest ratio since World War II. Federal revenues in fiscal 2009 are projected to fall by $166 billion, or 6.6 percent.

Noting there are huge uncertainties hanging over the economy, Mr. Sunshine said the CBO is forecasting that the recession will end sometime in the second half of 2009.

Not only will the recession be lengthy and deep, but, in the absence of outside action, the recovery is likely to be shallow, the CBO said. Banking and housing market problems still constitute a huge drag on growth. Growth for fiscal 2010 is forecast to be a modest 1.5 percent.

“Although financial conditions are expected to improve, the pace of improvement will be restrained because it will take time for financial institutions to recover from losses due to loan defaults,” the CBO report released Wednesday warned. “As a result, borrowers will continue to find the terms and availability of credit tight, which will increase the cost of capital and hold back the growth of investment and consumption, dampening economic activity for several years.”

In addition, unemployment, which Mr. Sunshine called a “lagging indicator,” is on the rise and will peak at 9 percent in 2010 — a level matched only twice for brief periods since the Great Depression.

The CBO deficit numbers come at a time of fierce debate on Capitol Hill over the size and structure of an economic stimulus plan, and its longterm impact on the federal balance sheet.

In a joint press conference, Sen. Judd Gregg of New Hampshire and Rep. Paul Ryan of Wisconsin — the ranking Republicans on the Senate and House Budget Committees — acknowledged the severity of the recession but warned that such spending should be a one-time event.

“The short-term stimulus events and massive deficit we’re going to run can only be tolerable if we put in place policies which show the American people that we’re serious about getting this under control in the long term,” Mr. Gregg said, adding that Congress must face the “fiscal tsunami” of entitlement reform.

Mr. Ryan said the country is coming to a “tipping point.”

“Sooner or later, the chickens are going to come home to roost. The dollar is going to be permanently weakened, our bonds are not going to be very attractive if we do not show the world and our markets that we’re getting serious about our fiscal situation,” he said.

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