NY Times, January 8, 2009
$1.2 Trillion Deficit Forecast as Obama Weighs Options
By DAVID STOUT and EDMUND L. ANDREWS
WASHINGTON — Changes in Social Security and Medicare will be central to
efforts to bring federal spending in line, President-elect Barack Obama
said on 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, which was accompanied by grim
unemployment predictions, 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, nor was there any hint that he expects to ask
Congress to approve draconian cuts in benefits. The programs are vital
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 nearing
retirement and, in the case of Medicare, the ever-rising cost of health
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. (Social Security is
financed through payroll taxes, as is Medicare, although the latter
program also depends on general tax revenue and premiums from
beneficiaries.)
Mr. Obama faces a confluence of bad economic news and problems. Tax
revenue is 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. The budget
office predicted that the unemployment rate, which was 6.7 percent in
November, would climb above 9 percent by the end of 2009.
“If we do nothing,” Mr. Obama said, “then we will continue to see red
ink as far as the eye can see.” And the underlying problem, he said, “is
not just a deficit of dollars, it’s a deficit of accountability and a
deficit of trust.”
Part of his approach, the president-elect pledged, would 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.
Ms. Killefer said she would “do my best to create a government that
works better for its citizens,” and that government employees “will be
central to this effort.”
As for the startling estimate from the nonpartisan Congressional Budget
Office, if it proves accurate, the budget deficit will 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 jump-start 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 House Republican leader, Representative John A. Boehner of Ohio,
said the budget office estimate “makes it clearer than ever that we
cannot borrow and spend our way back to prosperity,” and that he hoped
Republicans and Democrats could join in cutting wasteful spending.
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 anemic growth in 2010.
The agency warned the budget would be pummeled by both falling tax
revenue 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 revenue 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 probable 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 Reagan.
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