- The Washington Times - Tuesday, January 13, 2009

ANALYSIS:

Reining in a jaw-dropping $1.2 trillion budget deficit will be a daunting challenge for Congress and President-elect Barack Obama this year as the government is expected to add hundreds of billions more to pull the economy out of a deepening recession.

The Congressional Budget Office’s staggering 2009 estimate of red ink is well above the post-World War II record in 1983, and that does not include the $800 billion to $1 trillion in economic stimulus funds Mr. Obama intends to spend over the next two years on aid to the states and tax credits to millions of low-to-middle-income taxpayers. That will swell this year’s budget deficit to more than $2 trillion and already is drawing criticism on Capitol Hill and elsewhere for its immense cost and impact on future deficits.

“We have to be careful that we don’t do things which aggravate significantly in the out years this country’s fiscal strength,” said New Hampshire Sen. Judd Gregg, the Budget Committee’s ranking Republican.

“And what is very critical is that as we address trying to get the economy going by using a stimulus package, we’ve got to be very careful that we put in place programmatic activity that doesn’t add to the long-term debt of the nation,” Mr. Gregg said in a Senate speech last week.

Outside fiscal watchdog groups, including moderates who acknowledge the need for a stimulus package, also have begun warning that the stimulus plan is unnecessarily excessive and would saddle the country with untold debt that would take decades to pay off.

“When we are talking about an $800 billion package on top of a $1.2 trillion deficit, it is necessary to draw a distinction between what constitutes stimulus and what is business-as-usual government largess,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget.

“If we think about massive deficit spending as medicine for a sick economy, we also need to recognize that too much medicine can ultimately kill the patient,” Ms. MacGuineas said in response to Mr. Obama’s call for quick action on his giant stimulus plan.

“Almost all economists agree that we need stimulus, but overlooked is the fact that almost all economists also agree that the country’s long-term finances are completely unsustainable. We have to tell the world how we plan to pay for this,” she said.

Though CBO’s deficit projections seem beyond comprehension, part of the budget’s numbers are expected to decline in the short term, as CBO revealed it expects the base-line deficit to plunge by $500 billion to $700 billion because of smaller bailout outlays next year and possibly increasing tax revenues as the economy begins growing again.

The deficits are the result of many factors, including too much overall spending, faster growth in entitlements for Social Security and Medicare, and the U.S. Treasury’s financial bailouts to deal with the subprime mortgage and credit collapse that sent the economy into a nose dive.

Mr. Obama’s recovery plan envisions spending about $500 billion in aid to states and localities and rebuilding the nation’s roads, bridges and rail lines, among other public-works expenditures to repair decaying infrastructure. Another $300 billion will be used for tax cuts.

One silver lining in the $350 billion that was spent last year under the Treasury’s recovery plan to unclog credit arteries in the nation’s banking system could help offset part of the looming deficits in the next few years.

Though it did not receive much, if any, attention, CBO’s deficit outlook said that the government was expected to recoup much of the money spent by Treasury under the Troubled Asset Relief Program (TARP) when Treasury sells the stocks it received as part of the loan agreements from the major financial institutions it bailed out in the fall.

Mr. Gregg said “in the out years we’re going to get that money back because we’re buying assets. In fact, we will get it back with interest, and we may actually make a little money for the taxpayers.”

Long term, however, conservative budget analysts are projecting unprecedented deficits.

“My projection is that the deficit does not fall below $700 billion again, ever. In fact, it continues to go well past that. It bottoms out at $718 billion in 2012 and then increases indefinitely,” said Brian Riedl, chief budget analyst for the Heritage Foundation.

“The reason in the long term is the retirement of 77 million baby boomers who are going to drive Social Security, Medicare and Medicaid spending to levels that will make it nearly impossible to significantly reduce the budget deficits without fundamental reform,” Mr. Riedl said.

The rest of the budget, discretionary spending and small entitlements, will fluctuate, he predicts, “but when half of the federal budget in Social Security and Medicare is increasing 8 percent a year, it’s nearly impossible to bring the deficit down.”

That is why Mr. Gregg urged his Senate colleagues Thursday to temper their zeal for a massive stimulus program, because the government is facing “a fiscal tsunami” when the baby boomers show up at the end of this decade to begin collecting their entitlements.

“We’re talking about $60 trillion coming at us. That’s debt that’s coming at us. That doesn’t count the debt we’re putting on the books today to deal with this economic slowdown,” he said.

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