CBO sees budget deficit exploding to $1.2 trillion in fiscal 2009

The Congressional Budget Office forecast Wednesday that the fiscal 2009 deficit will total $1.2 trillion while the economic recession will last through 2009, making it the longest since World War II.

"The sharp downturn in housing markets across the country, which undermined the solvency of major financial institutions and severely disrupted the functioning of financial markets, has led the United States into a recession that will probably be the longest and the deepest since World War II," CBO said in its Budget and Economic Outlook.

The CBO also predicted that the recession, which officially began in December 2007, would continue for another year with GDP falling 2.2 percent in 2009, followed by 1.5 percent growth in 2010.

Unemployment is projected to reach 9 percent in early 2010 from an average of 5.7 percent in 2008 and a predicted 8.3 percent in 2009. Job losses, diminished wealth and the credit squeeze will hurt consumption, the CBO said, although lower commodity prices are expected to mitigate these effects.

The projected deficit of $1.2 trillion, or 8.3 percent of GDP, is considerably more than the $438 billion fiscal 2009 deficit CBO projected in September or the $454.8 billion in fiscal 2008.

The projection, moreover, does not include the economic stimulus package, estimated at $775 billion or more, which congressional leaders hope to have ready for President-elect Obama by mid-February, CBO said.

Senate Budget Chairman Kent Conrad, D-N.D., said that while the need for a stimulus package is overwhelming, the nation must begin to reduce the deficit after the economic crisis eases. "While it is understandable that this package will worsen our near-term budget picture, we should not enact provisions that will exacerbate our long-term deficits and debt," said Conrad in a statement. House Budget Chairman John Spratt, D-S.C., echoed Conrad's comments and blamed the Bush administration for the growing deficit.

"The outgoing president has encumbered our nation with deficits and debt that will take a generation of sustained effort to overcome," he said. Senate Budget ranking member Judd Gregg, R-N.H., also called for fiscal discipline.

Conrad and Gregg want to set up a commission to make the tough decisions required to fix long-term fiscal challenges, such as healthcare costs.

Former Government Accountability Office chief David Walker also backs their proposal. At a news conference following the CBO release, Gregg said he could support a stimulus with the price tag currently under discussion but that "the devil is in the details."

House Budget ranking member Paul Ryan, R-Wis., said at the event that House Republicans are getting together this evening to discuss stimulus package ideas.