Start countin' that change!
If you thought 2008 was bad for the economy, wait till you hear what the U.S. government is predicting for 2009.
According to a report released Wednesday by the Congressional Budget Office (CBO), the U.S. federal deficit will reach $1.2 trillion in 2009--more than twice the figure last year. Unemployment will climb to 8.3% this year and top 9% in 2010. Real economic output will decline by as much as 2.2%. The U.S. will be faced with the lingering specter of deflation and a continued correction in the housing market.
And that's before Congress enacts an economic stimulus package that could add another $775 billion or more to the deficit.
In fact, the CBO estimate says the current recession "will probably be the longest and the deepest since World War II" and will probably last well into the second half of 2009.
Shocking? Hardly. But Barack Obama's incoming administration, which takes office in less than two weeks, certainly has its work cut out for it. On Thursday, Obama is scheduled to make a major speech in Virginia on the economy and his plan to fix. This week he has warned several times of the possibility of trillion-dollar deficits in years to come.
"If we continue to do nothing, we will continue to see red ink as far as the eye can see," he said.
Reasons abound for the ballooning deficit, including a 6.6% decline in tax revenues compared to 2008; more than $180 billion in transaction costs associated with the Troubled Asset Relief Program (TARP), the Treasury Department's bailout fund for the U.S. economy; the $240 billion price tag of the government's takeover of mortgage buyers Fannie Mae (nyse: FNM - news - people ) and Freddie Mac (nyse: FRE - news - people ); and increased spending on unemployment compensation.
There will be a bit of naturally induced relief, though it may take the country years to recover from Uncle Sam's spending binge in 2008. According to the CBO, the $1.2 trillion deficit projection is equal to 8.3% of total U.S. economic output. By 2010, the deficit should shrink to about 4.9% of gross domestic product, or about $703 billion. Much of this will be due to less spending on Fannie, Freddie and the TARP.
Of course, all of these figures could change, depending on the actions of Obama's administration and the new Congress. The president-elect's annual budget request is due to Congress in early February. Obama says he'll have more to say on how his administration will address ballooning entitlement costs on health care and Social Security closer to that date.
For now, the president-elect is pressing Congress to pass an earmark-free, nearly $800 economic stimulus plan that would consist of about $300 billion in tax cuts to jolt the economy back to life (and appease Republicans who favor tax cuts rather than simply increased government spending).
Too weak? Possibly. Some economists have projected that in order to be effective, the stimulus should be as much as $1.3 trillion. Obama himself says it will likely be "on the high end of our estimates," though not as high as some predictions, due to the size of the deficit.
It won't be easy to push this through Congress quickly, however. House Republican Leader John Boehner, R-Ohio, warns that "the deficit estimate makes it clearer than ever that we cannot borrow and spend our way back to prosperity when we're already running an annual deficit of more than $1 trillion."
Maybe not. But Washington can certainly try.
SOURCE: http://www.forbes.com/2009/01/07/budget-congress-tarp-biz-beltway-cx_bw_0107budget.html
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