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Budget office predicts growing deficit but no recession next year

By Peter Cohn CongressDaily January 23, 2008

The Congressional Budget Office is forecasting that, after three years of declining budget deficits, the fiscal 2008 shortfall will rise to $219 billion, up from $163 billion last year. The estimates do not factor in the costs of wars in Iraq and Afghanistan, extensions of expiring tax cuts and the economic stimulus package.

Senate Budget Chairman Kent Conrad, D-N.D., estimated that about 80 percent of the $140 billion to $150 billion impact of the stimulus will be felt in this fiscal year, along with $30 billion more in war costs, for an fiscal 2008 deficit actually exceeding $350 billion. The new forecasts "show an explosion in federal deficits and debt if we continue to follow the president's deficit-financed tax and spending policies," he said in a statement.

The report noted that if President Bush's 2001 and 2003 tax cuts were extended, if Congress continued to prevent the alternative minimum tax from hitting more taxpayers and if discretionary spending continued to grow beyond inflation, it would add $5.7 trillion to the deficit over the next 10 years when debt service is factored in. At the end of five years, instead of being in balance, the budget actually would have a deficit of $402 billion, CBO said.

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The budget outlook in the next decade will be affected by the growth of Medicare and Medicaid and by more retirees eligible for Social Security.

"Attaining fiscal stability in the coming decades almost certainly will require some combination of reductions in the growth of spending and increases in taxes as a share of the economy," CBO said. "If tax revenues as a share of GDP remain at current levels (roughly 19 percent of GDP), additional spending for Medicare, Medicaid and Social Security will eventually cause future budget deficits to become unsustainable."

Senate Budget ranking member Judd Gregg, R-N.H., called it "disappointing" that Democrats last year did not act to rein in major entitlement programs but expressed hope they would this year.

With both parties scrambling to put together an economic stimulus program, CBO said the economy probably will "slacken further in 2008" but that it did not expect the slowdown to be large enough to register as a recession. Inflation-adjusted GDP growth is projected to slow from an estimated 2.2 percent last year to 1.7 percent this year, before rebounding to 2.9 percent in 2009. Employment growth will slow further and unemployment will average 5.1 percent this year, CBO said.

"Today's report provides the latest evidence that we should act quickly to strengthen the economy, and that we should do so in a way that is mindful of the long-term budget challenges that we face," House Budget Chairman John Spratt, D-S.C., said at a hearing this morning on the CBO estimates.

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  • “The estimates do not factor in the costs of wars in Iraq and Afghanistan, extensions of expiring tax cuts and the economic stimulus package.” Then what good is this estimate? That is the same problem with the inflationary index. If the inflation index leaves out grocery staples and fuel costs, it is merely a tool to calm the masses and reflects nothing truthfully. “Judd Gregg, R-N.H., called it "disappointing" that Democrats last year did not act to rein in major entitlement programs” Dubya fought tooth and nail against a measly spending of $7 – 25 billion in necessary funding for vital programs deprived for the past seven years, and now thinks all our problems will be solved by giving $150 billion to the poor and indigent. This isn’t merely a return to Regan-omics, but a transformation of the trickle-down theory into a biblical flood. These people got into trouble for spending more than they could afford and now he wishes them to spend even more. If I may, even if constrained to the indigent and lower income (without removing the income caps), even if they spend every dime instead of paying down their crushing debt; consider that the 7% return on $150 billion will directly return $10,500,000 in taxes 8in 2008. Multiply that times the 5 times every federal dollars changes hands for a total over the next three years of $52,500,000. That is only a third of what we are mortgaging our children against by banking on the poor money management of the populace. Further more, we are continuing to encourage bad financial management of people who can not afford to make any more mistakes. Rather consider how the lower current federal interest rate of 3.5% could translate in flat mortgage rates of 5 – 7%. If the feds coerced the predatory mortgage companies to settle and refinance all those ARMs at the lower rate, possibly even for 15 year notes; maybe we could dig ourselves out of this mess and teach people to manage their money better. All this voodoo economics will have to come due some day. I just hope my grandkids can cope with the legacy we are building for them. Tip off Posted February 5, 2008 11:13 AM
  • With tens of trillions in hedge fund losses by the financial "experts", an attempt to cover them on the backs of borrowers worldwide and specifically interest only or sub-prime mortgagees in the States, there will not be a new recession next year, it will be the same one we're in now or worse. Blame it on the retirees, then let's see how much of what was promised can be taken back. We will surely climb right out of this economic black hole by taking Grandma's SSI check to pay taxes. Can you say HYPER-INFLATION? Jon Posted January 24, 2008 4:06 PM
  • So, CBO says there isn't going to be a recession. And they know so much better than all the other financial "experts" that are predicting one? Michelle Posted January 24, 2008 10:07 AM
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