Report Places 2009 Budget Deficit at $1.2 Trillion

Members of the House of Representatives of the 111th Congress, accompanied by family members and guests, are sworn in in the House Chamber on Capitol Hill in Washington. (AP Photo/Pablo Martinez Monsivais) (Pablo Martinez Monsivais - AP)

Slowing tax revenues and a historic bailout of the U.S. financial system will drive the annual budget deficit to nearly $1.2 trillion this year, even without the massive economic stimulus package now under review by Congress, the Congressional Budget Office reported this morning.

The CBO also projected that the deficit would hit $703 billion in the fiscal year that starts in October.

In a news conference in Washington, President-elect Barack Obama warned that "the deficit we are inheriting" this year is bound to grow beyond $1.2 trillion.

"We know that our recovery and reinvestment plan will necessarily add more," he said. "My own economic and budget team projects that unless we take decisive action, even after our economy pulls out of its slide, trillion-dollar deficits will be a reality for years to come."

Obama said his team is still consulting with members of Congress about the size of the stimulus package.

"We expect that it will be on the high end of our estimates, but will not be as high as some economists have recommended, because of the constraints and concerns we have about the existing deficit," he said. Obama's advisers have put the package in the range of $675 billion to $775 billion, but some economists have said it should be between $800 billion and $1.3 trillion.

Democratic leaders in Congress described today's deficit announcement as stunning and warned of exploding debt in the future. But they said Congress must nevertheless pass a stimulus package quickly.

The CBO budget outlook provides the first official estimate of how rampant federal spending aimed at stabilizing markets and reviving the economy have affected the government's finances. The picture is grim: the numbers for both this year and fiscal 2010 represent deficits far larger than anything ever recorded in dollar terms. This year's figure represents 8.3 percent of the nation's gross domestic product -- the largest percentage of the nation's economic activity since the end of World War II in 1945.

However, the new deficit figures substantially understate the expected size of the budget gap. If Congress approves Obama's request for nearly $800 billion in spending and tax cuts to pull the nation out of recession, this year's deficit could easily soar to $1.6 trillion or more.

The deficit projections include a 6.6 percent drop in tax collections this year, down $166 billion from 2008. They also include $180 billion in costs for the Troubled Assets Relief Program, last year's effort to shore up the U.S. financial sector, as well as $240 billion to incorporate the federal bailouts of Fannie Mae and Freddie Mac into the U.S. budget.

The projected deficit for 2010, meanwhile, excludes not only stimulus costs, but also spending for the wars in Iraq and Afghanistan and a variety of expensive tax cuts that are extended annually, including relief for millions of families from the alternative minimum tax. It also excludes any new spending on Obama initiatives, such as health care reform.

Obama faces the twin challenges of managing the deficit, the annual gap between tax revenues and spending, and the swelling national debt, the amount of money that the government has borrowed to finance years of deficits. His task is made all the more difficult because new spending is widely viewed as the best way to pull the nation out of the recession. While Obama has declined to say how he intends to deal with such challenges, an economic adviser said yesterday that the president-elect plans to unveil "major initiatives" designed to eventually bring the deficit under control as part of his first budget proposal, which he will submit to Congress next month.