Obama warns about years of trillion-dollar deficits

Section:

By Jeff Zeleny
The New York Times
Tuesday, January 6, 2009

http://www.nytimes.com/2009/01/07/us/politics/07obama.html?_r=1&hp

WASHINGTON -- President-elect Barack Obama on Tuesday braced Americans for the unparalleled prospect of "trillion-dollar deficits for years to come," a stark assessment of the economic condition facing the country that he said would force his administration to impose tighter fiscal discipline on the government.

Mr. Obama sought to draw a distinction between the need to run what would likely be record deficits by any measure for the next several years and the necessity to begin bringing them down substantially in following years. Even as he prepares a stimulus package that is likely to total in the range of $800 billion in new spending and tax cuts over the next two years, he said he would seek to make sure that money is used wisely and that he would work with Congress to implement spending controls and efficiency measures throughout the federal budget.

"I'm going to be willing to make some very difficult choices in how we get a handle on his deficit," Mr. Obama said, speaking about the dire fiscal outlook as he met with his top economic advisers for a second straight day. "That's what the American people are looking for and, you know, what we intended to do this year."

Mr. Obama sought to reassure lawmakers, as well as the financial markets, that he is aware of the long-term dangers of running huge deficits. Big deficits force the government to borrow more money, saddling future generations with large financial burdens. The problem is especially acute now because credit markets, which at times in recent months have been all but frozen as the financial system has been buffeted, could be further strained by the need to finance the huge deficit.

The Congressional Budget Office will release its latest budget estimates on Wednesday, which will provide the first official predictions of the built-in shortfalls tied to the economic slowdown and the collapsing financial markets. Mr. Obama's team of economic and budget advisers have spent nearly two months scouring the budget, preparing to submit their first budget.

"When the American people spoke last November, they were demanding change -- change in policies that helped deliver the worst economic crisis that we've see since the Great Depression," Mr. Obama said, speaking to reporters on Tuesday. He added, "They were demanding that we restore a sense of responsibility and prudence to how we run our government."

Behind Mr. Obama's reassuring message about fiscal discipline is the government's need to borrow a staggering amount of money over the next two years without driving up interest rates in the process. Analysts predict that the federal deficit will hit a new record of at least $1 trillion this year, which would be not only be more than double the previous record in 2005, but would also overtake the previous record for deficit as a share of the gross domestic product.

Diane Rogers, chief economist at the Concord Coalition, a non-partisan organization that supports fiscal discipline, estimated that the deficit this year would hit 7 percent of GDP.

That deficit, which could easily be duplicated in 2010, will occur just as the government will have to grapple with the much bigger and more intractable long-term budget problems tied to soaring costs of Medicare, Social Security for retiring baby-boomers.

Most economists agree that Mr. Obama and the Congress have no choice except to ignore short-term deficits and place top priority on fighting the country's worst economic downturn in at least a half-century. But the short-term budget short-falls are big enough to pose serious headaches in themselves, especially if bond investors start demanding higher interest rates.

In just the first three months of the 2009 fiscal year, which began on Oct. 1, the government spent $408 billion more than it took in. About one-third of that short-fall stemmed from the Treasury Department's rescue program of injecting capital into banks, which the government will book as an "investment" rather than "spending."

The recession itself will add hundreds of billions of dollars to the deficit. Even before Congress adds any new stimulus measures, higher outlays will climb for existing unemployment benefits, food stamps and other social programs. Tax revenues will fall because of rising unemployment, falling corporate profits and huge investment losses in the stock and bond markets. Mr. Obama's stimulus program could add another $400 billion in each of the next two years.

As the latest budget estimates are released on Wednesday, the good news, at least for the moment, is that the Treasury's borrowing costs are as almost as low as they have ever been. Short-term Treasury rates are hovering just above zero, but the rates on 10-year Treasury bonds are below 2 percent.

To some extent, the government can lock in those low rates by selling long-term securities. But it will still have to refinance hundreds of billions of dollars a year. As a result, its annual debt-service costs could be hit with a double-whammy: a big increase in total debt and an eventual increase in interest rates as they recover from their current rock-bottom lows.

Goldman Sachs recently estimated that government debt will balloon by $1.75 trillion in 2009. But Goldman analysts were optimistic that borrowing costs will remain low, partly because they predicted that the United States saving rate is likely to soar as both consumers and businesses hold back on spending.

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