Deficits soar even with rosy Obama budget assumptions

David Lightman | McClatchy Newspapers last updated: May 12, 2009 07:15:08 AM WASHINGTON — The White House on Monday projected 2009 and 2010 federal budget deficits far higher than it forecast just two and a half months ago, even as it continued to defy most experts and predict that the economy is headed for a strong comeback starting late this year. Economists scoffed at the latest administration predictions. "If they keep playing this game, they're going to have real credibility problems," predicted Brian Bethune, the chief U.S. financial economist at IHS Global Insight, an economic research firm. The new administration budget said that the fiscal 2009 deficit would reach $1.84 trillion, or $89 billion more than forecast in February, while the 2010 figure now is estimated at $1.26 trillion, or $87 billion above the previous number. The fiscal 2008 deficit was $459 billion. The new figures dwarf the $17 billion in budget reductions and program terminations that President Barack Obama proposed with a flourish last week, reductions that Congress is unlikely to approve in full. Budget Director Peter Orszag, writing on his blog, explained that the latest changes, which are the final pieces of Obama's rollout of his $3.6 trillion fiscal 2010 budget, reflect "upward technical revisions" caused largely by lower-than-expected revenues and higher-than-anticipated costs for rescuing financial institutions. As it has done since it took office in January, however, the administration tried to stay upbeat. Monday it offered new plans for cutting health care costs and in the new budget still maintained its February economic assumptions, which are rosier than nearly any other economists foresee. The White House still is projecting that the nation's economy will shrink by 1.2 percent this year and increase by 3.2 percent next year. In addition, it projects that "by the end of this year," the economy will be growing at a 3.5 percent annual rate. The nonpartisan Congressional Budget Office predicts a gross domestic product decline of 3 percent this year, but 2.9 percent growth next year, while the April consensus of 50 blue-chip private economists sees a 2.6 percent decline in 2009 and only 1.8 percent growth next year. The administration's assumptions, Orszag said, will be revisited this summer, "the traditional point" when an administration makes such revisions. The biggest discrepancy involves unemployment, which reached 8.9 percent last month. The White House sees the number declining to an average of 7.9 percent next year, well below the CBO's 9 percent estimate and the blue chip 9.5 percent. "The (Obama) unemployment number is crazy," said Roberton Williams, senior fellow at the Urban Institute-Brookings Institution Tax Policy Center. The Office of Management and Budget explains the discrepancy by saying that its assumptions are based on data available as of late January. The jobless rate that month was 7.6 percent. It reached 8.9 percent in April, the government reported Friday. The CBO issued its forecast in March and the blue-chip predictions came out last month; in a revision Monday, the blue-chip forecast turned slightly more pessimistic. The differences can be significant in assessing the federal deficit's future path, because recovering economies mean more jobs and more revenue and less government spending. Even with its more optimistic economic scenario, the administration projects record deficits for years to come. The annual deficit would drop to $512 billion by 2013, but then would begin to go up again, reaching $779 billion by 2019, as the costs of Social Security and government health care programs soar, the administration projects. It's a grim picture, analysts said. "Even using their . . . economic assumptions — which now appear to be out of date and overly optimistic — the administration never puts us on a stable path," said Marc Goldwein, the policy director of the nonpartisan Committee for a Responsible Federal Budget. Global Insight's Bethune said that Obama could face a growing political problem. His public relations initiatives stress his devotion to slashing spending. In recent months, the president has vowed to cut at least $100 million in wasteful spending, trim $17 billion in unnecessary programs and overhaul Congress' system of using earmarks, or special funding for local projects. Monday, the Council of Economic Advisers reported that the economy was on track to create or save the 3.5 million jobs promised in this winter's $787 billion economic stimulus. However, Republicans are pouncing eagerly on what they view as budget hypocrisy. "The president's recent proposal for some modest reductions in government spending was a start, but the administration acknowledged today that since the president took office, their projections for the deficit grew five times faster than the proposed cuts would save," said Senate Minority Leader Mitch McConnell, R-Ky. Obama, analysts suggested, should be more circumspect, because taming this budget is proving unusually difficult. "So many things are in motion," Bethune said, including weak banks, weaker American auto companies, fragile consumer confidence and so on. "Their economic assumptions could become an issue; it's not a good way to go." To Goldwein, the latest budget news was more confirmation that Obama needs to make hard choices to cut popular programs. "The president made clear that he understands the critical importance of fiscal discipline," he said. "Now we need to see some action."