CBO sees budget deficit rising next year

By Richard Cowan and Donna Smith

WASHINGTON (Reuters) - The U.S. budget deficit will swell to record levels in 2009 as the "turbulent" economy cuts revenues and hikes government spending, a congressional report said on Tuesday in an assessment that does not include the possible costs of rescuing two gigantic mortgage companies.

The Congressional Budget Office's latest budget and economic forecast projected a deficit of about $407 billion this year, rising to a record $438 billion in the fiscal year that starts on October 1. That would shatter the 2004 record of $413 billion and would be in contrast to the $161 billion budget shortfall last year, CBO said.

"The significant expansion in the deficit is the result of a substantial increase in spending and a halt in revenue growth. In 2008, CBO estimates, federal spending will be 8.3 percent higher than it was in 2007; at the same time, total revenues will be less than they were in 2007," the report said.

Rising foreclosures on home mortgages have spilled over into other sectors of the U.S. economy. At the same time energy prices have risen rapidly, as have other consumer goods.

At a news conference, CBO Director Peter Orszag said while it is too soon to say whether the U.S. officially is in a recession, the recent rise in unemployment and economic weakness "are consistent with the pattern seen in past recessions, the past few recessions to be precise."

Orszag also said CBO's budget estimates do not take into account possible government costs related to the U.S. government takeover of mortgage giants Fannie Mae and Freddie Mac, which were announced this week.

But Orszag said Fannie Mae and Freddie Mac operations should be directly incorporated into the federal budget, which could further swell deficits.

If CBO's predictions hold true, President George W. Bush's goal of leaving office early next year with the federal government on a glidepath to balancing its budget by 2012 will not be realized.

According to CBO's forecast, deficits will hit $431 billion in 2010 and then start falling. But the government would run a deficit of $126 billion in 2012 and grow to $147 billion in 2013. The projections assume Bush's tax cuts will expire at the end of 2010 as scheduled under current law.

With congressional and presidential elections less than two months away and the economy a key issue in the campaigns, CBO noted "an unusual amount of turbulence has continued to beset the U.S. economy."

The Iraq war, another hot-button issue in the campaigns, continues to contribute to the large deficits. CBO said $858 billion has been spent on combat and related operations in Iraq and Afghanistan since 2001, with most on the war in Iraq.

"The recent increase in the deficit is the result of the slow economy and the bipartisan decision to enact a stimulus package," White House Budget Director Jim Nussle said.

"Driving down the deficit and balancing the budget is achievable if we help the economy grow by keeping spending in check," he added.

Along those lines, the Bush administration is resisting calls from Democrats in Congress for a second economic stimulus package, beyond the $168 billion measure passed this year.

Senate Budget Committee Chairman Kent Conrad, a North Dakota Democrat, said that CBO's report confirmed "the federal debt will grow at an unsustainable rate, which means more borrowing from China, more borrowing from Japan, and more borrowing from oil exporters like Saudi Arabia."