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Federal deficit could hit $1 trillion this year

By JIM ABRAMS

Associated Press

November 26, 2008

WASHINGTON (AP) — The federal government's ledger has gone from a surplus just seven years ago to facing a prospect of a $1 trillion deficit next year.

Given those dire financial straits, President-elect Barack Obama said at a news conference Tuesday, "Budget reform is not an option. It's a necessity."

But unlike his predecessor President George W. Bush, who in better economic times talked about returning to surpluses by 2012, "balanced budgets" were not in Obama's vocabulary.

The government's first obligation, he said, was to spark an economic recovery and put people back to work. To do that, the Democratic-led Congress is expected to have a new stimulus package, costing in the $500 billion range, ready to go when Obama takes office in January.

That's on top of the hundreds of billions already spent or committed by Treasury and the Federal Reserve to revive the moribund financial markets. On Tuesday the government announced two new programs providing $800 billion to help unfreeze the market for consumer debt and to make mortgage loans cheaper and more available.

All that, in the short term, will send the deficit into the stratosphere.

Budget hawks were stunned when the federal deficit hit a record $455 billion in fiscal 2008, which ended Sept. 30, more than double the previous year's deficit. But now, even the fiscally conservative say another doubling, to $1 trillion or more, may be inevitable if the economy is to be rescued.

James Horney, director for federal fiscal policy at the Center on Budget and Policy Priorities, said it was "pretty likely" that this year's deficit will approach $1 trillion. Big deficits can't be helped in bad times, he said, as the government is required to spend more to help the needy and stimulate the economy even as tax revenues decline.

"The question, of course, is what's the alternative?" Horney said. If the government doesn't move to stimulate the economy, "the outcome could be much worse."

Obama made clear Tuesday that he will take a hard look at the budget once the economic ship is righted.

"We can't sustain a system that bleeds billions of taxpayer dollars on programs that have outlived their usefulness or exist solely because of the power of politicians, lobbyists or interest groups. We simply can't afford it.

"This isn't about big government or small government. It's about building a smarter government that focuses on what works," he said.

Josh Gordon, policy director of the Concord Coalition, a budget watchdog group, found it encouraging that Obama was discussing reform and noted that — just as Republicans may be in the best situation to cut military spending — "a Democratic president might be in the best position to convince Congress of the need to cut ineffective programs."

But he also pointed out that domestic discretionary spending is only a small part of the overall federal budget dominated by military and entitlement programs such as Medicare and Medicaid, and that every program has its "specific patrons and specific interest groups" defending it.

While nobody likes a deficit, many economists agree that heavy federal government spending — on food stamps or unemployment benefits or public works projects — may be necessary to keep economies moving in times of recession or war.

The problem is that this time Washington was racking up massive deficits even before the current economic downturn.

The government recorded surpluses in the fiscal years 1998 through 2001. But that all changed once Bush was in office a year. Saddled with costs from the Sept. 11 attacks plus the tax cuts he pushed through Congress, Bush took the $127 billion surplus he inherited from former President Bill Clinton and turned it into a $159 billion deficit the following year. Then wars in Iraq and Afghanistan and more tax cuts swelled it to $413 billion in 2004, a record until $454.8 billion for the fiscal 2008 year that ended Sept. 30.

The White House Office of Management and Budget in July estimated the 2009 deficit at $482 billion, but that doesn't take into account possible losses down the road from loans and investments made under the $700 billion financial rescue plan enacted in October or other efforts to bail out stricken financial institutions.

The Congressional Budget Office put the deficit in October, the first month of fiscal 2009, at a staggering $232 billion. Its figure included $115 billion in bank stock purchases the Treasury Department made as part of the financial bailout.

The deficit "could easily exceed $1 trillion in fiscal 2009 and go even higher in 2010," Mark Zandi, chief economist and co-founder of Moody's Economy.com, said at Senate Budget Committee hearings last week. He said borrowing by the Treasury could top $2 trillion this year.

Borrowing adds to the national debt, the money the federal government owes to states, corporations, individuals and foreign countries such as China and Japan that buy U.S. Treasury notes, bonds and other debt instruments. The debt, which stood at about $5.7 trillion in 2007, topped the $10 trillion mark in October and now stands at about $10.6 trillion.