Budget office predicts growing deficit but no recession next year

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.

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.