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Obama budget will generate huge deficits, analysis finds

White House stands by spending plan

By Andrew Taylor
Associated Press / March 21, 2009
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WASHINGTON - Despite new estimates that say President Obama's budget would generate unsustainable deficits averaging almost $1 trillion a year, the White House insisted yesterday that the flood of red ink won't swamp its costly agenda.

The Congressional Budget Office figures released yesterday predict Obama's budget would produce federal deficits totaling $9.3 trillion between 2010 and 2019. That's $2.3 trillion higher than the administration predicted in its budget proposal just last month.

The CBO says the deficit under Obama's policies would never go below 4 percent of the size of the economy, figures that economists agree are unsustainable. By the end of the decade, the deficit would exceed 5 percent of gross domestic product, a dangerously high level.

The latest figures throw a major monkey wrench into efforts to enact Obama's budget, which promises universal healthcare, and higher spending for domestic programs such as education and renewable energy.

The dismal deficit figures, if they prove to be accurate, inevitably raise the prospect that Obama and his allies controlling Congress would have to consider raising taxes after the recession ends or else pare back his agenda.

White House budget chief Peter Orszag said that CBO's economic projections are more pessimistic than those of the White House, private economists, and the Federal Reserve, and that he remained confident that Obama's budget, if enacted, would produce smaller deficits.

Even so, Orszag acknowledged that if the CBO projections prove accurate, Obama's budget would produce deficits that could not be sustained.

"Deficits in the, let's say, 5 percent of GDP range would lead to rising debt-to-GDP ratios that would ultimately not be sustainable," Orszag told reporters.

Deficits so big put upward pressure on interest rates as the government offers more attractive rates to attract borrowers. "It will lead to higher interest rates to the point where it will force policymakers to make changes," said economist Mark Zandi, chief economist at moodyseconomy.com.

Republicans immediately seized on the numbers. They say Obama's budget plan taxes, spends, and borrows too much, and they have been sharply critical of his $787 billion economic stimulus measure and a just-passed $410 billion spending bill that gave big increases to domestic agency budgets.

"This report should serve as the wake-up call this administration needs," said House GOP leader John Boehner of Ohio. "We simply cannot continue to mortgage our children and grandchildren's future to pay for bigger and more costly government."

But Obama insisted yesterday that his agenda is still on track. "What we will not cut are investments that will lead to real growth and prosperity over the long term," he said.

Obama's allies in Congress and among liberal and labor advocacy groups agreed, asserting that the worsening deficit figures show the need for the sweeping change and that the way to dig out from all the red ink is to make costly investments.

"The best way to reduce the deficit is to grow our economy; the best way to grow our economy is to act on the priorities in the president's budget," House Speaker Nancy Pelosi said in a statement. She said she expects the Democrat-controlled House to approve "a budget resolution that reflects the president's priorities and will help usher in a new era of job creation and lasting prosperity for the American people."

Obama's $3.6 trillion budget for the 2010 fiscal year beginning Oct. 1 contains ambitious programs to overhaul the healthcare system and initiate new "cap-and-trade" rules to combat global warming.

Both initiatives involve raising federal revenues sharply higher, but those dollars wouldn't be used to defray the burgeoning deficit and would instead help pay for Obama's health plan and implement Obama's $400 tax credit for most workers and $800 for individuals.

Many Democrats were already uncomfortable with Obama's budget, which promises to cut the deficit to $533 billion in five years. The CBO says the red ink for that year will total $672 billion.

Most disturbing to Obama allies, including Senate Budget Committee Chairman Kent Conrad, are the longer-term projections, which climb above $1 trillion again by the end of the next decade and approach 6 percent by 2019.

Among about a dozen major changes to Obama's budget, Conrad is looking to curb Obama's 9 percent increase for non-defense appropriations to show short-term progress.

He insists that the long-term deficit and debt crisis will have to be addressed via a special bipartisan commission.

"The budget that I'll submit will cut the deficit by more than two-thirds over these first five years," Conrad. "These imbalances are just absolutely unsustainable."

The worsening economy is responsible for the even deeper fiscal mess inherited by Obama.

As an illustration, CBO says the deficit for the current budget year, which began Oct. 1, will top $1.8 trillion, $93 billion more than foreseen by the White House. That would equal 13 percent of GDP, a level not seen since World War II.

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