Budget experts predict $1.6 trillion deficit

This year's federal budget deficit will be bigger than any previous deficit, but it won't be as big as once expected.

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Both the White House and Congressional Budget Office (CBO), Washington's official fiscal scorekeeper, projected the 2009 deficit to be slightly more than $1.8 trillion for 2009. But budget experts said the deficit will be closer to $1.6 trillion when the fiscal year ends Sept. 30.

“I think everybody anticipates it will be slightly less than what was expected in the spring,” said William Hoagland, a former Senate Republican budget aide.

Spending this year through July has increased by $530 billion, or 21 percent, compared to last year, the CBO said. Bailouts for banks and the mortgage giants Freddie Mac and Fannie Mae have cost $252 billion just in fiscal 2009.  Tax revenue for the first three quarters of 2009 has fallen by approximately $350 billion, or 17 percent, compared to the same period last year, due mostly to the effects of the recession on payroll, income and corporate taxes.

Fiscal conservatives will be looking to the White House's midyear budget review, due out later this month, to see how quickly the Obama administration plans to pare those deficits down.

A big reason for the smaller-than-expected deficit is that the Obama administration won't need the $250 billion it reserved for more financial bailouts, said Hoagland, now a vice president for public policy at CIGNA Corp. With big banks such as Goldman Sachs and Bank of America reporting large profits in the last quarter, the administration is unlikely to ask Congress for the extra cash, which lawmakers have been reluctant to hand over.

In a normal year, a $200 billion adjustment would seem like a bigger deal, Hoagland noted.

“Two hundred billion less sounds slight when dealing with trillions of dollars,” he said. “In the old days, that would be a big adjustment.”

This year, the size of the deficit is projected to still be quadruple the $459 billion deficit of last year. Lower revenue because of the recession and billions spent on a stimulus bill and bailouts of the country’s banks are responsible for the large shortfall.

Still, former Democratic congressional budget aide Stan Collender said, the less-than-expected deficit could boost the Obama administration, which is facing GOP criticism over spending. The deficit number, combined with signs of life in July's economic indicators — including a slowdown in the economic contraction and the numbers of jobs lost — could give a shot in the arm to an administration once criticized for making projections that were too rosy.

The administration deserves some credit for coming up with fairly accurate deficit and economic predictions, Collender said. The White House had predicted that the economy would grow by year's end, which economists expect to happen since the gross domestic product (GDP) fell by only 1 percent in the last quarter. The economy had shrunk by 6.4 percent in the previous quarter.

But any political benefit would be a product of perceptions and not a strong fiscal situation, budget experts said. While the deficit won't look as bad as it could have, it's still big.

“[The White House] strategy was probably right: ‘Throw as much in there in the beginning of the year to get the deficit as high so it’s only going to look better as it goes along,' " said Collender, now a partner at Qorvis Communications.

Hoagland said he’ll be more focused on what the deficit will look like in future years, when the recession has passed and the White House will seek to stop the flow of red ink. Obama has pledged to cut the deficit in half by the end of his first term.

Douglas Holtz-Eakin, a former CBO director and economic adviser to Sen. John McCain's (R-Ariz.) 2008 presidential campaign, said the White House's next deficit estimates may be less optimistic because of the increased spending. The stimulus will end up costing more than its initial $787 billion price tag since lawmakers and the White House are likely to extend provisions in the stimulus that were set to expire, including increased unemployment and health benefits, Holtz-Eakin said.

“It's all going to cost more,” Holtz-Eakin said about Obama's agenda. “I can't imagine this is going to be fun exercise for them.”

The White House's initial budget proposals said that the deficits in future years would be reduced to less than $600 billion within five years. That would constitute roughly 3 percent of the economy. The projected $1.8 trillion deficit this year is nearly 13 percent of GDP. White House Budget Director Peter Orszag has said deficit-to-GDP levels of 4 percent or higher are unsustainable. But the CBO has said that Obama's policies would fall only to 3.9 percent of GDP and rise to 5.5 percent of GDP by 2019.

“The key is that deficit-to-GDP figure. Is that an unsustainable rate?" Hoagland said.