Growing federal debt looms over potential bailout of economy

WASHINGTON -- As the Bush administration and Congress try to craft an economic stimulus plan, a dark cloud hangs over them: the federal deficit.

Iraq war costs of $9.6 billion a month and a gaping federal deficit that's funded by borrowing from foreign governments limit how aggressively the U.S. government can cut taxes or boost spending to fend off a recession.

Just over the horizon, a fiscal crisis that some call a day of reckoning looms larger.

Statistics released Wednesday by the nonpartisan Congres- sional Budget Office show that the federal deficit -- the gap between what the government spends and the revenue it collects -- is projected to leap to $250 billion in the current budget year. That's up 53 percent from the $163 billion deficit in fiscal 2007.

$400 billion deficit possible

If Congress approves the roughly $140 billion economic stimulus plan now being discussed, the deficit for the current 2008 fiscal year, which began last Oct. 1, could swell to almost $400 billion.

The budget office presented those estimates to Congress on Wednesday as part of its budget and economic outlook for 2008 to 2018.

"Ongoing increases in health care costs, along with the aging of the population, are expected to put substantial pressure on the budget in coming decades," Director Peter Orszag told the House Budget Committee. "Those trends are already evident in the current projection period."

Lawmakers can sharply cut government spending, sharply raise taxes or pass some combination of spending cuts and tax increases, Orszag said.

The Bush administration frequently notes that although the deficit is high, it's low in historical terms as a percentage of the total economy -- 1.5 percent this budget year, according to budget office estimates.

That's true. But it's a snapshot of the moment. Seen in the context of what lies ahead, the deficit puts the U.S. economy on a weaker footing to address the fiscal challenges that successive Congresses have ducked.

Comptroller General David Walker, the chief auditor of the government's balance sheet, has all but shouted from the rooftop that the U.S. government had more than $50 trillion in unfunded liabilities at the close of 2006, compared with $20 trillion in 2000. That number is the sum of everything the government has promised to pay in the future, from pensions and government health care to interest on the debt.

The liabilities amount to about $170,000 per person or $440,000 per U.S. household, according to Walker. The largest drivers of this trend are big entitlement programs such as Social Secu-rity and Medicare, the government insurance program for the elderly. These programs will come under even more strain when the first baby boomers -- people born from 1946 to 1964 -- reach official retirement age in two years.

Some economists believe that to avoid passing the fiscal burden to future generations, lawmakers and President Bush should propose ways to pay for the stimulus -- a combination of tax rebates for consumers and tax relief for business -- over a longer time.

"If we do something right now like a tax rebate and a couple of other things, it would be sensible to pay for it over a five-year period or something like that," said Alice Rivlin, a former vice chairman of the Federal Reserve who's now a senior researcher at the Brookings Institution, a center-left policy research organization.

While supportive of a short-term stimulus, Rivlin said that long-term challenges must be considered.

"In the long run, we are in serious deficit trouble, and the long run is not so long anymore," said Rivlin, who was the director of the Congressional Budget Office from 1975-83. "We have just made too many promises under our entitlement programs, and we're going to have to change course."

Earlier this month, the rating agency Moody's Investors Service warned that if Congress didn't address the expected budget strains associated with Social Security and Medicare, U.S. government bonds could lose their AAA rating. Investors then would demand higher interest rates to reflect a greater risk of a U.S. government default on its debt obligations, further eroding the nation's fiscal outlook.

But the negotiations between Bush and Congress on the stimulus package include little discussion about how to pay for it.

Democrats and Republicans alike suggest that a temporary economic spark prompted by the right kind of stimulus should produce tax revenues to replace what the Treasury is losing.

They're right. But only if the U.S. economy doesn't fall into a recession before the stimulus takes effect. If recession strikes, there would be even less incoming revenue and a bigger federal deficit.

Congressional leaders and Treasury Secretary Henry Paulson are narrowing their differences in search of a bipartisan economic stimulus deal that could move swiftly through Congress.


Tax rebates: Checks of at least $300 for all people earning a paycheck, including low-income earners who make too little to pay income taxes. Families with children would receive an additional $300 per child, while those paying income taxes could receive higher rebates. Rebates may be capped at $1,200 for couples with children.

Business tax write-offs: Spurring business investments with so-called bonus depreciation, more generous expense rules and a change to allow businesses suffering losses now to reclaim taxes previously paid.

Housing rescue: Allowing Fannie Mae and Freddie Mac to buy loans larger than $417,000.


Permanent tax cuts: Republicans concede that their top priority would have to be left out.

Unemployment insurance: Democrats wanted to extend benefits past 26 weeks.

Food stamps: A boost for benefits

Medicaid: Democrats gave up on including Medicaid payments to states.

Low-income heating subsidies: Democrats are surrendering the fight to include them.

Infrastructure spending: Spending on transportation or repair projects already under way is off the table.