$1.2 Trillion Deficit Forecast as Obama Weighs Options
The New York Times
Published: Jan 08, 2009
WASHINGTON — Changes in Social Security and Medicare will be central to efforts to bring federal spending in line, President-elect Barack Obama said Wednesday, as the Congressional Budget Office projected a $1.2 trillion budget deficit for the fiscal year.
“We expect that discussion around entitlements will be a part, a central part” of efforts to curb federal spending, Mr. Obama said at a news conference. By February, he said, “we will have more to say about how we’re going to approach entitlement spending.”
Alluding to the projected deficit, Mr. Obama said: “And we know that our recovery and reinvestment plan will necessarily add more. My own economic and budget team projects that, unless we take decisive action, even after our economy pulls out of its slide, trillion-dollar deficits will be a reality for years to come.”
Mr. Obama did not offer specifics on how he would address Social Security and Medicare, which are financed by payroll taxes. The programs are crucial to millions of Americans, and talk of cutting benefits has long been considered politically explosive. On the other hand, both programs face long-range problems, given the growing legions of baby-boomers and the ever-rising cost of medical care.
The demographic problems have been recognized for years. Social Security was adjusted in the early 1980s, with people born later having to wait longer to begin collecting all of their benefits. There was no hint in Mr. Obama’s remarks on Wednesday that he anticipates asking Congress for any draconian cuts in current benefits.
Mr. Obama faces a confluence of bad economic news and problems. Tax revenues are declining, public confidence in the financial system is shaky, and the president-elect has called for spending close to $800 billion to stimulate the economy and create some three million jobs.
“If we do nothing,” Mr. Obama said, “then we will continue to see red ink as far as the eye can see.”
Part of his approach, the president-elect pledged, will be to eliminate wasteful spending. As expected, he announced the appointment of Nancy Killefer to the post of chief performance officer to head a “line by line” scrutiny of federal spending.
“For nearly 30 years — as a leader at McKinsey & Company and as assistant secretary for management, chief financial officer, and chief operating officer at Treasury under President Clinton — Nancy has built a career out of making major American corporations and public institutions more effective, more efficient and more transparent,” Mr. Obama said.
As for the startling estimate from the nonpartisan Congressional Budget, if it proves accurate, the budget deficit would be nearly two and a half times bigger than the previous record shortfall of $455 billion reached in 2008.
The estimate was far higher than most other analysts have predicted. If combined with the gigantic stimulus package of tax cuts and new spending that Mr. Obama is preparing, which could amount to nearly $800 billion over two years, the shortfall this year could hit $1.6 trillion.
But Mr. Obama and Democratic leaders in Congress said they were more determined than ever to pass a stimulus package by Feb. 16.
“This is one of the worst budget forecasts I have seen in my lifetime,” said Senator Kent Conrad, Democrat of North Dakota and chairman of the Senate Budget Committee.
But Mr. Conrad said the forecast merely highlighted the urgency of enacting a stimulus program to prevent the recession from getting worse.
“We must act quickly to pass an economic recovery package that will create jobs and jumpstart economic growth,” he said. “While it is understandable that this package will worsen our near-term budget picture, we should not enact provisions that will exacerbate our long-term deficits and debt.
The budget office said its grim budget projection stemmed from the severe plunge of the economy, which it predicted would contract 2.2 percent in 2009 and register only anemic growth in 2010.
It predicted that the unemployment rate, which was 6.7 percent in November, would climb above 9 percent by the end of 2009.
The agency warned the budget would be pummeled by both falling tax revenues and rising costs for unemployment benefits, food stamps and other social programs that kick in as shock absorbers during a recession.
It estimated that tax revenues will sink by $166 billion, or 6.6 percent.
But one reason that the agency’s deficit estimate was higher than those of outside analysts was that it added in hundreds of billions of dollars in spending tied to the government’s existing bailout programs, which the Bush administration has thus fare treated as “investments” it would recoup rather than “spending” or “costs” that are down the drain.
For example, the budget office estimated that the present-value cost of the Treasury Department’s $700 billion bailout program for financial institutions — known as the Troubled Assets Relief Program — would be $180 billion in 2009. The agency said that estimate was based on its judgment of the program’s risks and likely losses over time.
In addition, the budget office said it included all the money used in propping up Fannie Mae and Freddie Mac, the government-sponsored mortgage finance companies that the Treasury seized in September and put into a conservatorship. Those costs would add $240 billion to the deficit in 2009.
If the forecasts are remotely accurate, the deficit would obliterate all previous postwar deficit records not only in nominal dollar amounts but also in the way economists consider most accurate: the deficit as a share of the nation’s economic output.
The agency said the deficit would equal 8.3 percent of gross domestic product, obliterating previous postwar record of 6 percent, reached in 1983 under President Ronald W. Reagan.
© The New York Times. All rights reserved. This article originally appeared in The New York Times.
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