Deficit may pass $500B

From Wire Reports
Published: July 29, 2008

WASHINGTON - The government’s budget deficit will rise past $500 billion next year, according to gloomy new estimates, a record level of debt that promises a dramatically tougher economic outlook for the winner of the presidential race.

The deficit will reach $482 billion in the 2009 budget year that will be inherited by Republican Sen. John McCain or Democrat Sen. Barack Obama, the White House estimated yesterday. That figure is sure to rise after adding the tens of billions of dollars in additional Iraq war spending it does not include, and the total could be higher yet if the economy does not recover as the administration predicts it will.

The result: the biggest deficit in terms of dollars, though several were higher in the 1980s and early 1990s as a percentage of the overall economy.

Neither campaign is backing off campaign promises—McCain to cut taxes and Obama to expand health and education spending—in light of the new figures.

“We can’t afford not to invest in some major initiatives such as health and energy and more tax cuts,“ Obama’s economic adviser, Jason Furman, said.

But Democrats controlling Congress suggest that plans may have to change once the next president takes office.

“Whoever becomes the next president will have a very, very sobering first week in office,“ said Senate Budget Committee Chairman Kent Conrad, D-N.D.

McCain promises to renew the full roster of Bush tax cuts enacted in 2001 and 2003 and add many more for businesses and those people who pay the alternative minimum tax. The Bush tax cuts will expire at the end of 2010 and renewing them would soon cost more than $200 billion a year. Eliminating the alternative minimum tax at the same time would cost almost as much.

Obama would repeal tax cuts on wealthier taxpayers and investors but would leave most of the Bush tax cuts in place while pushing for additional cuts for senior citizens, the middle class and the working poor. He also wants lots of new spending for health care, education and many other federal programs.

“There’s a total disconnect between today’s report and what we’re hearing on the campaign trail,“ said Robert Bixby of the Concord Coalition budget-watchdog group.

The deficit confronting the next president is reminiscent of that which former President Bill Clinton faced in 1993. Under Wall Street pressure, Clinton abandoned promises of tax cuts and pushed a tax-heavy deficit-reduction plan through a Democratic Congress.

The administration said that the deficit is being driven to a record high by the weak economy and the stimulus payments being made to 130 million households in an effort to keep the country from falling into a recession. But the numbers could go even higher if the economy performs worse than the White House predicts.

The budget office predicts that the economy will grow at a rate of 1.6 percent this year and will rebound to a 2.2 percent growth rate next year. That is a half point higher than predicted by the widely cited “blue chip” consensus of business economists. The administration also sees inflation averaging 3.8 percent this year, but easing to 2.3 percent next year—better than the 3 percent seen by the blue-chip panel.

“The nation’s economy has continued to expand and remains fundamentally resilient,“ said the budget-office report.

A $482 billion deficit would easily surpass the record deficit of $413 billion set in 2004. The White House in February had forecast that next year’s deficit would be $407 billion.

The deficit numbers for 2008 and 2009 represent about 3 percent of the size of the economy, which is the measure seen as most relevant by economists. By that measure, the 2008 and 2009 deficits would be smaller than the deficits of the 1980s and early 1990s that led Congress and earlier administrations to cobble together deficit-reduction packages.

Still, the new figures are so eye-popping in dollar terms that they may restrain the appetite of the next president to add to the deficit with expensive spending programs or new tax cuts. In fact, pressure may build to allow some tax cuts enacted in 2001 and 2003 to expire as scheduled, with Congress also feeling pressure to curb spending growth.

The administration underestimates the deficit because it leaves out about $80 billion in war costs. In a break from tradition—and in violation of new mandates from Congress—the White House did not include its full estimate of war costs.

On a slightly brighter note, the deficit for the 2008 budget year ending Sept. 30 will drop from an earlier projection of $410 billion to $389 billion, the report said.

McCain used the new 2009 estimates to criticize the Bush administration for its “profligate spending” and Democratic rival Obama, who has declined to endorse the goal of McCain—and congressional Democrats—to balance the budget.

“I have an unmatched record in fighting wasteful earmarks and unnecessary spending in the U.S. Senate, and I have the determination and experience to do the same as president,“ McCain said in a statement. McCain again called for a full plate of multi-trillion dollar tax cuts, though campaign adviser Douglas Holtz-Eakin said that some modifications could be made to McCain’s economic plan to try to reach balance.

Obama’s campaign used the new numbers to criticize McCain for embracing Bush’s tax cuts. As for Obama’s plans, campaign adviser Furman said that Obama would cut wasteful spending, close corporate loopholes and roll back the Bush tax cuts on upper brackets while still promising to make “health care affordable and putting a middle-class tax cut in the pocket of 95 percent of workers and their families.“