Budget observers predict crunch on spending

A growing budget deficit, combined with the financial crisis and its likely responses, will force the next president to rein in spending initiatives, budget observers said Wednesday. "Both candidates are going to have to limit their initiatives dramatically," Leon Panetta, former OMB director under President Bill Clinton, said at a meeting on budget issues convened by the Committee for a Responsible Budget.

Proposals under Democratic presidential nominee Sen. Barack Obama of Illinois or Republican nominee Sen. John McCain of Arizona would add about $400 billion to the deficit, he added. He recommended the next president lay out a five-year strategy that would deal with the financial crisis in the short-term but lead to deficit restraint over the longer term, such as reform of entitlement programs and enforcement of pay/go. Panetta's comments come after CBO estimated Tuesday that the federal budget deficit was about $438 billion in fiscal 2008 -- $276 billion more than the shortfall recorded in 2007. The fiscal year ended Sept. 30.

For the short term, many experts believe that another stimulus package will be needed. "I think we do need a short-run stimulus package," despite the fact that it would require issuing more debt to pay for it with the hope the foreign investors will continue to buy it, said Alice Rivlin, a fellow at the Brookings Institution and former director of the CBO. "We have borrowed a lot. But ... if we let our economy fall into depression we would be in even worse trouble, so we have to take the chance that we can borrow some more and get out of this recession."

After failing to get the second stimulus package, which cost $61 billion, signed into law before breaking for the year, House Democratic leaders discussed the possibility of a new stimulus plan during a conference call Tuesday, according to senior aides. Exact details of the new package and when it may be brought to the floor for a vote remain unclear, but sources said an announcement from House Speaker Nancy Pelosi, D-Calif., about the package is possible by early next week. Democratic leaders have discussed returning to session this month to vote on economic legislation before the November election. A Pelosi spokesman said no decision has been made on the matter.

Another Democratic House leadership aide suggested that party leaders do not want to raise the markets' hopes by getting a stimulus package only through the House and not the Senate -- an indication that such legislation might make more sense next year with a new Congress and president. Rudolph Penner, a fellow at the Urban Institute and a former CBO director, said the growing budget deficit and surging issuance of federal debt should preclude any short-term stimulus. But David Walker, president of the Peterson Institute for International Economics and a former chief of GAO, said that more details of the package need to be known before it can be judged.

"Not all economic stimulus plans are of equal merit and have equal impact," Walker said. It really depends to a great extent on what is the size, what is the nature of it, and what is the likely impact going to be." Walker also recommended that a bipartisan commission be established to take on the entitlement reform, as well as tax reform, while Rivlin countered that the commission could not come up with a grand solution for all those issues. Instead, she recommended Social Security reform first as a way to build confidence toward overhauling other programs such as Medicare, Medicaid and tax reform.

Christian Bourge contributed to this story.