WASHINGTON - As the Bush administration and Congress try to craft an economic-stimulus plan, a dark cloud hangs over them: the federal deficit.
Iraq 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.
Yesterday, statistics released by the nonpartisan Congressional Budget Office projected that the federal deficit would grow to $250 billion in the current budget year. That would be a 53 percent increase from the $163 billion deficit in fiscal 2007.
If Congress approves the roughly $140 billion economic-stimulus plan now being discussed, the deficit for fiscal 2008, which began Oct. 1, could swell to almost $400 billion. The White House and Democratic and Republican lawmakers worked into last evening to agree on a package.
The CBO presented its estimates to Congress yesterday 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. "Those trends are already evident in the current projection period."
Lawmakers can sharply cut government spending, sharply raise taxes or pass some combination of spending cuts and tax increases, Orszag said.
The Bush administration frequently notes that although the deficit is high, it is low in historical terms as a percentage of the total economy - 1.5 percent this budget year, according to CBO estimates.
That is true. But seen in the context of what lies ahead, the deficit puts the U.S. economy on a weaker footing to address the fiscal challenges that successive Congresses have avoided.
Comptroller General David Walker, the chief auditor of the government's balance sheet, has all but shouted from the rooftop that the U.S. 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 everything the government has promised to pay in the future, from pensions and government health care to interest on the national debt.
The liabilities now amount to about $170,000 per person or $440,000 per U.S. household, according to Walker. The largest drivers of this trend are big entitlement programs such as Social Security and Medicare.
"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 M. Rivlin, a former vice chairman of the Federal Reserve and now a senior researcher at the Brookings Institution, a center-left think tank.
"In the long run, we are in serious deficit trouble, and the long run is not so long anymore," said Rivlin, who was the director of the CBO from 1975 to 1983. "We have just made too many promises under our entitlement programs, and we're going to have to change course."