Ballooning deficit may haunt rush to prop up economy

WASHINGTON — As the Bush administration and Congress try to craft an economic-stimulus plan, a cloud hangs over them: the federal deficit.

Iraq and Afghan war costs of $9.6 billion a month and a gaping federal deficit funded by borrowing from foreign governments limit how aggressively the U.S. government can cut taxes or boost spending to fend off a recession.

Just over the horizon, a fiscal crisis that some call a day of reckoning looms larger.

Statistics released Wednesday by the nonpartisan Congressional Budget Office (CBO) show that the federal deficit — the gap between what the government spends and the revenue it collects — is projected to leap to $250 billion in the current budget year. That's up 53 percent from the $163 billion deficit in fiscal 2007.

If Congress approves the roughly $150 billion economic-stimulus plan being discussed, the deficit for the current fiscal year, which began Oct. 1, could swell to almost $400 billion.

The CBO presented those estimates to Congress as part of its budget and economic outlook for 2008 to 2018.

"Ongoing increases in health-care costs, along with the aging of the population, are expected to put substantial pressure on the budget in coming decades," Director Peter Orszag told the House Budget Committee.

Lawmakers can sharply cut government spending, sharply raise taxes or pass some combination of the two, Orszag said.

The Bush administration frequently notes that although the deficit is high, it's low in historical terms as a percentage of the total economy: 1.5 percent this budget year, according to CBO estimates.

That's true. But in the context of what lies ahead, the deficit puts the economy on a weaker footing to address the fiscal challenges that successive Congresses have ducked.

Comptroller General David Walker, chief auditor of the government's balance sheet, has all but shouted from the rooftop that the government had more than $50 trillion in unfunded liabilities at the close of 2006, compared with $20 trillion in 2000.

That number is the sum of what the government has promised to pay in the future, from pensions and government health care to interest on debt.

The liabilities amount to about $170,000 per person or $440,000 per household, Walker said. The largest drivers of this trend are entitlement programs such as Social Security and Medicare.

These programs will be more strained when the first baby boomers reach official retirement age in two years.

Some economists think that to avoid passing the fiscal burden to future generations, lawmakers and President Bush should propose ways to pay for the stimulus — a combination of tax rebates for consumers and tax relief for businesses — over a longer time frame.

"If we do something right now like a tax rebate and a couple of other things, it would be sensible to pay for it over a five-year period or something like that," said Alice Rivlin, a former vice chairman of the Federal Reserve and now a senior researcher at the Brookings Institution, a center-left policy-research organization.

While supportive of a short-term stimulus, Rivlin said long-term challenges must be considered.

"In the long run, we are in serious deficit trouble, and the long run is not so long anymore," said Rivlin, director of the Congressional Budget Office from 1975 to 1983. "We have just made too many promises under our entitlement programs, and we're going to have to change course."

This month, the rating agency Moody's Investors Service warned that if Congress didn't address the expected budget strains associated with Social Security and Medicare, U.S. government bonds could lose their AAA rating.

Investors then would demand higher interest rates to reflect a greater risk of a U.S. government default on its debt obligations, further eroding the nation's fiscal outlook.