White House sees record budget gap in 2009

By Jeremy Pelofsky and David Lawder

WASHINGTON (Reuters) - The Bush administration on Monday projected the U.S. budget deficit will soar to a record of nearly half a trillion dollars in fiscal 2009 as a housing-led economic slowdown cuts into government revenues.

The economic and fiscal deterioration will complicate efforts to bring the budget to balance and pose challenges for whoever takes over the White House in January, either Republican Sen. John McCain or Democratic Sen. Barack Obama.

"I believe whoever becomes the next president will have a very, very sobering first week in office," predicted Senate Budget Committee Chairman Kent Conrad, a North Dakota Democrat.

Reacting to the White House's new prediction that the budget deficit will hit $482 billion in the fiscal year that starts October 1, Conrad said that number easily could rise by an additional $80 billion when the full costs of the Iraq war are tallied next year.

The economy has been hobbled by the housing market collapse and soaring food and energy prices. In February, the Democratic-controlled Congress and President George W. Bush approved a $168 billion, two-year stimulus plan to ward off recession.

With the slowing economy and the cost of the economic stimulus plan, the White House said it thinks the deficit will hit a record $482 billion in fiscal 2009. However, it cut its forecast for the current fiscal year to $389 billion.

White House budget chief Jim Nussle cited the government stimulus checks and slower economic growth as primary reasons for larger deficits in 2008 and 2009. "The determination was made that getting the economy back on track was a higher priority than immediate deficit reduction," he told reporters.

In February, the administration forecast the deficit would hit $410 billion this year and drop to $407 billion in 2009.

The new report said the budget deficit would fall to $178 billion in 2010, and surpluses would emerge in 2012.

However, the deficit projections did not include the full amount of funding for the wars in Iraq and Afghanistan or costly tax law changes, and acknowledged it would be a "challenge" to reach surpluses in 2012.

Nussle also poured cold water on the idea of a second economic stimulus package floated by some Democrats and instead pressed lawmakers to approve energy legislation to boost the economy, including permitting offshore drilling.

"The proposals we hear about sound a lot more like election stimulus or political stimulus than it does economic stimulus," Nussle told reporters.

The White House also lowered its forecast of 2008 economic growth to 1.6 percent from 2.7 percent -- bringing it into line with private-sector projections. It said growth should pick up to 2.2 percent next year, showing more optimism than many private economists.

It forecast inflation at 3.8 percent this year, but said it should ease to 2.3 percent in 2009.

"We don't think this is a rosy scenario in any way. We think it's a realistic scenario," said Edward Lazear, chairman of the White House Council of Economic Advisers.