Estimated 2009 Budget Deficit Seen Falling by $262 Billion
By Deborah Solomon
WASHINGTON -- The Obama administration shaved $262 billion from its estimated 2009 federal budget deficit but said the U.S. will run a $9 trillion deficit over the next 10 years -- $2 trillion more than it forecast earlier this year.
The administration, in its mid-year budget review, painted a picture of a nation that is at once stabilizing as the economy begins to recover but that is also in for a prolonged period of economic weakness, joblessness and unsustainable government spending.
Unemployment is expected to fare far worse than initial White House projections in February, when the administration predicted a jobless rate of 8.1% for 2009, a number that has already been surpassed by reality. The administration now foresees unemployment hitting 10% at some point over the next year and a half, with the jobless rate averaging 9.3% in 2009 and 9.8% in 2010.
Chair of the White House Council of Economic Advisers Christina Romer addresses a breakfast meeting earlier this month.
"We do predict unemployment will reach 10% for some months and some quarters," Christina Romer, who heads President Barack Obama's Council of Economic Advisers, said in a call with reporters to discuss the revised budget assumptions.
The White House is also projecting a slower climb out of the recession than earlier this year, estimating negative 2.8% economic growth for 2009, as opposed to its earlier estimate of negative 1.2% growth. For 2010, the administration sees 2% growth, down from the rosier 3.2% it projected in February. The revised estimate "reflects new information all forecasters received earlier this year about the severity of the forecast," said Ms. Romer.
Ms. Romer said the revisions are largely due to deterioration in economic output since January, when the administration first cobbled together its budget projections, and the unusual nature of this recession, in which joblessness is higher than many expected.
A small piece of good news: The administration is predicting a smaller 2009 deficit of $1.58 trillion, down from $1.84 trillion predicted in February. That revision is attributable largely to smaller-than-expected costs associated with the financial crisis.
Many financial companies receiving bailout money are returning funds and the administration said it removed a budget placeholder that assumed another $250 billion in related costs. The White House also is estimating that less money will be spent by the Federal Deposit Insurance Corp., on bank rescues.
"We now expect that the policies put in place to repair the financial system will cost taxpayers less than expected," said Peter Orszag, who heads the White House's Office of Management and Budget.
Still, in a measure of the dire state the nation's fiscal picture, the level of U.S. public debt when measured as a percentage of economic output is projected to reach its highest levels since World War II. The administration is projecting that public debt will hit 66.3% of gross domestic product in 2010, more than any other time since the 1940s, when it peaked at more than 121% of GDP.
That figure is more than symbolic. Higher debt means the U.S. is paying more to finance its deficit. Interest payments are projected to hit 3.4% of GDP by 2019.
Republicans plan to assail the administration's projections by saying they paint too rosy a picture by assuming revenue that is unlikely to materialize. Doug Holtz-Eakin, who was Republican Sen. John McCain's economic adviser in the 2008 presidential election, said in a memo prepared for the Republican congressional leadership that the Obama team was using false assumptions to pad its numbers, including $640 billion from its planned cap-and-trade program, which has yet to be approved by Congress, and $200 billion from taxing international business.
Administration officials blamed the worsening long-term deficit outlook on increased spending associated with programs to help blunt the impact of the recession. The U.S. will have to spend more on such programs as unemployment insurance and food stamps as more people go without work.
The bulk of the long-term deficit is primarily related to spending on entitlement programs, such as Social Security and Medicare. Costs associated with those programs are projected to continue growing, eventually swamping the federal budget.
Mr. Orszag said the administration is committed to bringing down the size of the budget deficit but said that now is not the moment to rein in government spending.
"It's desirable to allow deficits to increase during an economic downturn," he said, referring to the stimulating effect that increased government spending can have on the economy. Many economists say the administration's $787 billion stimulus package, even as it adds to the federal deficit, is also fueling growth, adding anywhere from one to three percentage points in second-quarter GDP.
Mr. Orszag said the administration would detail in its 2011 budget "proposals to put the nation on a fiscally sustainable path." A key to getting those costs under control, he said, is to rein in spending on health care costs, which are adding to the ballooning Medicare tally. Mr. Orszag said the administration's health care overhaul would help bring down those costs.
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