CBO: US deficit ballooning to record $1.7 trillion

Higher forecast will complicate Obama's bid to push spending plans through Congress.

The US budget deficit is turning a deeper shade of red.

On Friday, the Congressional Budget Office (CBO) said this year’s budget deficit is now nearly $1.7 trillion, more than $400 billion larger than it forecast two months ago. Next year’s deficit will be nearly $1.1 trillion, $430 billion more than its prior forecast. And that doesn't count President Obama’s budget plans to cut taxes and increase spending.

Although the deepening recession is partly to blame for the increase, the nonpartisan CBO says the increases are largely due to the sharp rise in spending (think fiscal stimulus package) and the higher cost of saving the financial system.

Political firestorm

The report immediately generated a firestorm of comment in Washington. Republicans said the new numbers ““should serve as a wake-up call” to the administration.” The President’s press secretary, Robert Gibbs, countered that the new numbers would not affect the administration's effort to cut the budget deficit in half by the end of his first term.

However, some independent budget experts say the sharply rising deficit will change the political context for Mr. Obama’s agenda.

“It will be much more difficult to reform health care, move on the energy front and invest in education,” said Isabel Sawhill, senior fellow at the Brookings Institution in Washington and a former official at the Office of Management and Budget (OMB) in the Clinton administration. “It makes his whole reinvestment agenda much more problematic, especially if there is not something done to curb entitlement spending in Social Security and Medicare.”

Toward a postwar record

The changes in the deficit forecast means the deficit as a share of the US economy is much higher. Two months ago, the CBO estimated the deficit would be 8.4 percent of gross domestic product (GDP). It has now raised that estimate to 11.9 percent, the highest level since World War II.

Next year, the budget gap will be 7.9 percent of GDP, up from a prior estimate of 4.9 percent, the CBO said.

“We’re in a bad situation and it’s only going to get worse,” says Roberton Williams, a senior fellow at the tax policy center at the Urban Institute in Washington.

Part of the problem is the recession. The CBO estimates that America's GDP will shrink by 1.5 percent this year but grow by 4.1 percent next year as the bulk of the government stimulus package kicks in. So this year, revenues will fall by $50 billion. But even with the recovery next year, by 2019, it estimates the gap in revenues will grow to $259 billion. “They are projecting things get worse on the revenue side,” says Mr. Williams, who used to work at OMB.

The OMB estimates on the revenue side might even be optimistic, says Williams since it assumes that all of President Bush’s tax cuts will disappear. “That won’t happen,” he predicts. “Obama has already said he won’t raise taxes for most taxpayers, just the top 5 percent.”

Capitol Hill response

The CBO news touched off a barrage of press releases and finger-pointing. On the Republican side, House Republican leader John Boehner (R) of Ohio called the report a “wake-up” call. “We simply cannot continue to mortgage our children and grandchildren’s future to pay for bigger and more costly government,” he said in a statement Friday.

However, Rep. John Spratt (D) of South Carolina and the ranking member of the budget committee, blamed the Bush administration for leaving the economy “in distress” and already deeply in debt.

“The Bush deficits will overhang the budget for years to come,” he said in a statement.

A decade of high debt

No matter who is to blame, the CBO issued yet one more sobering statistic: By 2019, the cost of servicing America's debt will be $450 billion a year. “That assumes a very low interest rate,” says Williams. “If our creditors lose confidence or demand a higher interest rate that number could rise rapidly.”

Congress has yet to tackle the major entitlements, Social Security and Medicare. “They currently make up 42 percent of the budget and they are growing rapidly,” Ms. Sawhill says. “In just two to three decades, they will be absorbing all our current revenues. So it’s imperative to address the issue now.”