Updated 1/7/2009 12:15 PM
1h 38m ago
1h 38m ago
By Richard Wolf, USA TODAY
WASHINGTON — The federal budget deficit will rise to a record $1.2 trillion this year, and a package of new spending increases and tax cuts planned by President-elect Barack Obama and congressional Democrats will push that figure higher, the Congressional Budget Office reported today.
In the first official reckoning of the damage caused by the severe recession, the report paints a bleak picture for 2009: a 2.2% drop in the size of the nation's economy, a jump in the jobless rate to 9.2% in early 2010, a 14% drop in home prices and a 1% decline in consumption.
The year-old recession, brought on by the slump in housing and its impact on financial institutions, "will probably be the longest and the deepest since World War II," the CBO said.
The budget deficit also will be the largest since World War II, and deficits will continue to haunt the federal government for the next decade, totaling $3.1 trillion. That's without any action by Obama and Congress to fix the economy, which will cause deficits to rise, the CBO said.
The report predicted that revenue will drop by $166 billion this year, or 6.6%. Spending will increase by more than $400 billion because of the government's takeover of the Fannie Mae and Freddie Mac housing corporations and the federal bailout of financial institutions.
Even when the recovery kicks in, it will be slow, the report concluded. The economy should increase by only 1.5% in 2010, it said.
"Although financial conditions are expected to improve, the pace of improvement will be restrained because it will take time for financial institutions to recover from losses due to loan defaults," the report said. "As a result, borrowers will continue to find the terms and availability of credit tight, which will increase the cost of capital and hold back the growth of investment and consumption, dampening economic activity for several years."
The report said the supply of vacant homes will slow the rebound in housing construction. "Spending also will be muted as households continue to adjust to the large declines in wealth of the past few years," the report said.
And foreign economies will not provide an offsetting boost in demand due to their own weakened conditions.
The report elicited gloom on Capitol Hill, where lawmakers nonetheless are planning about $800 billion in tax cuts and new spending to jump-start the economy.
"CBO's deficit projections are jaw-dropping," said Sen. Kent Conrad, D-N.D., chairman of the Senate Budget Committee. "This is one of the worst budget forecasts I have seen in my lifetime. President-elect Obama is being handed an absolute fiscal disaster."