WASHINGTON — The federal deficit will soar to almost $1.6 trillion this year, miring the nation in the deepest pool of red ink since the end of World War II, the nonpartisan Congressional Budget Office and the White House reported Tuesday.
The gap between spending and tax collections will amount to 11.2 percent of the overall economy, more than tripling last year's deficit of $459 billion, the budget office said. The gap is almost entirely the result of the severe economic downturn, the budget office said, which produced the sharpest drop in tax collections since the Great Depression and the biggest increase in spending since the Korean War.
In their traditional summertime budget review, administration officials acknowledged that they relied on overly optimistic assumptions about the economy when they forecast in March that President Barack Obama's budget plans would generate deficits of $7.1 trillion over the next 10 years. After factoring in the severity of the recession and the prospect of a more sluggish recovery, the White House concluded that the budget outlook is significantly worse and that the nation would be forced to borrow more than $9 trillion to support Obama's initiatives and other federal programs.
"While the danger of the economy immediately falling into a deep recession has receded,the American economy is still in the midst of a serious economic downturn," the White House report said. "The long-term deficit outlook remains daunting."
White House budget director Peter Orszag played down the grim forecast as unsurprising, saying the update merely brings White House projections in line with those of outside experts.
Still, this year's deficit is lower than officials expected, thanks in large part to reduced spending on the bailout of financial firms. The Troubled Asset Relief Program cost $133 billion this year, the budget office said - about $200 billion less than previously projected.
The government's shortfall will peak this year at $1.58 trillion before narrowing over the next decade, according to the White House. That is less than the $1.84 trillion projected in May.
The White House Office of Management and Budget indicated that the president will have to struggle to meet his vow of cutting the deficit in half in 2013 - a promise that earlier budget projections suggested he could accomplish with ease.
"This recession was simply worse than the information that we and other forecasters had back in last fall and early this winter," said Obama administration economic adviser Christina Romer.
Both the White House and the budget office said the recession should end in a few months, and the budget office credited the $787 billion stimulus package Obama signed in February with hastening the rebound. But congressional economists are predicting "a relatively slow and tentative recovery," and Romer acknowledged that the unemployment rate is likely to hit 10 percent later this year and remain there through the first months of 2010.
The continuing pain among workers, combined with the budget deficit, is likely to complicate Obama's ambitious legislative agenda when Congress returns to Washington in September. In town-hall meetings across the nation this month, voters have complained bitterly about rising federal spending as well as their fear of greater government intrusion in their lives.
Though the deficit figures are a bit better than expected, Republicans leapt upon the numbers Tuesday, arguing that a nation so deeply in hock can't afford a sweeping expansion of health coverage for the uninsured, Obama's top domestic priority.
"The alarm bells on our nation's fiscal condition have now become a siren," said Senate Minority Leader Mitch McConnell of Kentucky. "If anyone had any doubts that this burden on future generations is unsustainable, they're gone - spending, borrowing and debt are out of control."
"Americans are deeply shaken - and increasingly angered - by the explosion of spending and debt coming from Washington," said Rep. Paul Ryan, R-Wis., the senior Republican on the House Budget Committee. "If we continue to pursue this policy of Washington as the answer to every problem, it will cost Americans far more than the obvious burdens of ever-higher taxes, interest rates, inflation and debt; it will cost us the freedom to run our own lives."
Added Rep. Dave Camp, RMich., the senior Republican on the House Ways and Means Committee: "If the House Democrats' unaffordable $1 trillion health-care bill wasn't dead before, it should be now."
"It throws a wrench in health-care reforms," Maya MacGuineas, president of the bipartisan Committee for a Responsible Federal Budget, said. "No matter the specific numbers, they're a constant reminder that we're in bad, bad shape."
Orszag defended the president's health-care initiative, saying the overhaul is essential to reining in the skyrocketing costs of Medicare and Medicaid, the government health programs that threaten to drive future deficits even higher.
"I know some will say this report proves we can't afford health reform. I think that analysis has it backwards," Orszag said. "Given the long-term nature of that problem, we simply can't afford to wait."
Orszag acknowledged, however, that the health-care overhaul alone cannot solve the nation's budget problems, and he said deficit reduction will be "a top priority" when the president presents his next budget proposal to Congress in February.
Orszag said that the administration of Obama's Republican predecessor, George W. Bush, deserves much of the blame for the dark budget picture. More than half of the $9 trillion the nation is projected to have to borrow over the next decade is due to Bush's refusal to pay for new initiatives, such as sweeping tax cuts, the war in Iraq and a new prescription-drug benefit for Medicare recipients, Orszag said.
Even supporters of Obama's economic policies said the longterm outlook places the federal government on an unsustainable path that will force the president and Congress to consider politically unpopular measures, including tax increases and cuts in government programs.
"The numbers today portend the biggest budget fight we've probably had in decades in the United States," said Stan Collender, a former congressional budget official.
As president, Obama has called for maintaining some of the Bush policies that have fueled the deficit - he would extend some of the tax cuts beyond their 2010 expiration date, for example. But in light of the new deficit figures, Orszag hinted - without offering details - that Obama may revisit some of those decisions when he submits his next budget in February.
"Whatever their cause, the administration is very concerned about those out-year deficit figures," Orszag said, "and getting those deficits under control is a top priority of this administration."
The White House now projects that the economy will shrink by 2.8 percent this year, grow by 2.0 percent next year and heat up to 3.8 percent growth in 2011. Romer predicted an average unemployment rate of 9.8 percent next year.
As a result, government spending on social programs will continue to soar while tax collections will lag behind expectations. And deficits are likely to remain elevated even after the economy recovers, averaging more than $800 billion a year through 2019, when the White House forecasts the annual gap between spending and revenue will be $917 billion.
Both budget offices see the national debt - the accumulation of annual budget deficits - as nearly doubling over the next decade. The public national debt, made up of amounts the government owes to the public, including foreign governments, stood Tuesday at $7.4 trillion. White House budget officials predicted it would more than double to $17.5 trillion in 2019, or 76.5 percent of the gross domestic product. That would be the highest proportion in six decades.
Congressional Budget Office director Douglas Elmendorf said that if Congress doesn't reduce deficits, interest rates are likely to rise, hurting the economy. But if Congress acts too soon, the economic recovery - once it arrives - could be thwarted.
"We face perils in acting and perils in not acting," Elmendorf told reporters.
Despite the grim outlook, Orszag and Romer say that the stimulus package is working and that the nation's economy would be in far worse shape without it.
The simultaneous release of the two budget updates came amid a flurry of other economic news, including the president's announcement that he would reappoint Ben Bernanke as chairman of the Federal Reserve. Last week, officials also released some of the banner numbers from the White House deficit projections, fueling speculation that the administration was hoping to distract attention from the increasingly alarming fiscal picture.
Mark Zandi, chief economist at Moody's Economy.com in West Chester, Pa., predicted little reaction to the deficit news in the stock markets. "The market will view this as a very consensus-oriented forecast" and there won't be any significant response, he said.
Zandi predicted Congress will pass a second "mini" stimulus bill next year of about $250 billion to aid jobless workers, state governments and home buyers.
"The economy will be growing at an uncomfortably slow rate, not enough to bring down unemployment, and, of course, it's an election year" for Congress, he said.
Information for this article was contributed by Lori Montgomery of The Washington Post; by Roger Runningen, Brian Faler and Kristy Scheuble of Bloomberg News; and by Jim Kuhnhenn, Christopher S. Rugaber, Tom Raum and Stephen Ohlemacher of The Associated Press.
Front Section, Pages 1, 4 on 08/26/2009