CBO Economy Shrinking, Deficit Widening

The U.S. budget deficit will swell to a record $1.186 trillion in fiscal 2009, congressional forecasters said Wednesday, presenting President-elect Barack Obama with a daunting economic challenge.

The Congressional Budget Office also forecast the deficit could fall to $703 billion in the 2010 fiscal year which begins Oct. 1, 2009, as the U.S. recession begins easing.

The actual budget gaps for both years may be significantly greater as Washington prepares to jolt the economy with stimulus spending that could be $775 billion over two years.

The report shattered President George W. Bush's pledge that the government would balance its budget by 2012. Instead, CBO sees significant deficits at least through 2019.

The recession, which began in December 2007, has brought significant job losses and slashed consumer spending and tax revenues. Unhappy and anxious voters elected Obama to the White House and gave Democrats larger majorities in Congress.

CNBC.com photo composite

"This isn't your run-of-the-mill recession," CBO Acting Director Robert Sunshine told reporters. He said it might be the longest downturn since World War II.

CBO projected the U.S. economy will shrink 2.2 percent in 2009, the deepest for any calendar year since an 11 percent decline in 1946, before growing a modest 1.5 percent in 2010.

Unemployment will continue its steep climb, rising to an average of 8.3 percent this year and 9 percent in 2010. But Sunshine said that there was an "unusual amount of uncertainty" with the forecasts.

Obama, who takes office on Jan 20, has said he expects deficits around $1 trillion for years, forcing tough budget choices. But Wednesday he said his stimulus plan would not be as big as some have projected.

"We expect that it will be on the high end of our estimates but will not be as high as some economists have recommended because of the constraints and concerns we have about the existing deficit," Obama told a news conference.

'Grim Epitaph'

While trying to revive the economy, Obama also faces a longer-term problem of trying to control the rapid growth in the cost of federal retiree and health benefits for an aging population. Politicians have been putting off these tough decisions for years.

Signaling that he intends to stress fiscal responsibility, Obama Wednesday named former Treasury official Nancy Killefer to oversee budget and spending reform.

Rep. Paul Ryan of Wisconsin, the senior Republican on the House Budget Committee, warned that if the stimulus measure establishes permanent new spending programs, trillion dollar deficits would never go away.

The projected deficits dwarf last year's $455 billion -- the current record.

House Budget Committee Chairman John Spratt, a South Carolina Democrat, said the new CBO deficit forecast represented "a grim epitaph for the Bush administration," which inherited a surplus in 2001.

In coming months, Congress will be asked to approve tens of billions of dollars for the wars in Iraq and Afghanistan which have so far cost $857 billion, further adding to the deficit.

This year's deficit also swelled in part because of a $240 billion rescue of mortgaging financing companies Fannie Mae and Freddie Mac and a tax rebate, part of a 2008 stimulus package which will cost $168 billion over two years.

The Bush administration has loaned hundreds of billions of dollars to rescue financial institutions from risky real estate investments that went sour.

The bailout could cost the government $184 billion this year and $5 billion next year, the CBO projected. So far, the Treasury Department has spent about half of the $700 billion authorized by Congress.

CBO also estimated deficits over the next five years will total $1.972 trillion.

When Bush took office, total U.S. debt was $5.7 trillion.

It now stands at more than $10.6 trillion because of increased government spending, tax cuts and the recession.

One CBO official said the agency expects the government could breach its current borrowing authority, which is about $11.32 trillion, sometime after April.

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