Tony Fratto: A Ticking Fiscal Clock

Peter Orszag is in a race against time.

With the unemployment rate reaching a 26-year peak today of 9.5%, and soon to rise to well above 10% this year, Orszag—Director of the White House Office of Management and Budget—knows his budget projections are blown up.

With millions of fewer workers than the White House projected in its 'rosy scenario' economic outlook earlier this year, federal income tax revenues will significantly undershoot Orszag's projections.

And when you throw in a short-armed consumer and the massive deleveraging of both households and businesses, an ugly fiscal picture begins to take shape with deficits exploding beyond the already huge projections put forth by the White House.

The expected tsunami of red ink, resulting in unprecedented levels of federal borrowing, has bond and currency markets skittish. So far the effects have been modestly held in check—no blow up, although yields have risen and the dollar has faced some pressure.

But with even greater levels of borrowing now certain—all while the Fed attempts to navigate multiple exit strategies with financial rescue programs and the policy rate—the Administration is testing the limits of confidence, and increases the risk of a dollar or bond market "event".

What everyone agrees is needed to avoid such an event is for OMB Director Orszag to put forth a credible deficit reduction plan.

Office of Management and Budget Peter Orszag
Office of Management and Budget Peter Orszag

So why doesn't he?

The answer is health care.

The Obama Administration's No. 1 policy priority this year is to pass and sign health care reform legislation. And any health care reform legislation will result in deeper deficits. A public, credible plan to cut deficits today—with real spending cuts and tax increases—would derail the Democrats' expensive health care reform plans in Congress.

The Treasury Secretary, Tim Geithner, and National Economic Council Director Larry Summers, know that a deficit-reduction plan is an imperative. A confidence-shaking market would be a disaster.

But until the fate of health care is decided, White House economic officials will hold their breath with an eye on ticking clock in the markets.

Tony Fratto is a CNBC on-air contributor and most recently served as Deputy Assistant to the President and Deputy Press Secretary for the Bush Administration.