WASHINGTON The U.S. budget deficit will swell to a record $1.186 trillion in fiscal 2009, congressional forecasters said on Wednesday, the result of an economic recession that has cut tax receipts and caused massive government bailouts of banks and automakers.
The out-of-control deficit picture by the Congressional Budget Office illustrates the daunting economic challenges President-elect Barack Obama faces when he takes office on January 20.
But on Thursday, Obama will deliver a speech on the economy in which he will lay out his case for even more short-term deficit spending, possibly $775 billion or more over two years, to help heal the sick economy.
CBO also said the budget deficit could fall to $703 billion in the 2010 fiscal year which begins October 1, 2009, as the U.S. recession begins easing.
The actual budget gaps for both years may be significantly greater as Washington prepares to pass the gigantic economic stimulus bill by mid-February.
The CBO report shattered President George W. Bush's pledge that the government would balance its budget by 2012. Instead, CBO sees significant deficits at least through 2019.
The recession, which began in December 2007, has brought major job losses and slashed consumer spending and tax revenues. Unhappy and anxious voters elected Obama to the White House and gave Democrats larger majorities in Congress.
"This isn't your run-of-the-mill recession," CBO Acting Director Robert Sunshine told reporters. He said it might be the longest downturn since World War II.
CBO projected the U.S. economy will shrink 2.2 percent in 2009, the deepest for any calendar year since an 11 percent decline in 1946, before growing a modest 1.5 percent in 2010.
Unemployment was forecast to rise to an average of 8.3 percent this year and 9 percent in 2010. But Sunshine said there was unusual uncertainty with the forecasts.
Obama has said he expects deficits around $1 trillion for years, forcing tough budget choices. But on Wednesday he said his stimulus plan would not be as big as some have projected.
While trying to revive the economy, Obama also faces a longer-term problem of trying to control the rapid growth in the cost of federal retiree and health benefits for an aging population. Politicians have been putting off these tough decisions for years.
Obama said he was mindful that the stimulus package would add to the near-term deficits but said it was needed because of the "dire" condition of the economy.
Signaling that he intends to stress fiscal responsibility, Obama on Wednesday named former Treasury official Nancy Killefer to scour the budget for wasteful spending items.
Rep. Paul Ryan of Wisconsin, the senior Republican on the House Budget Committee, warned that if the stimulus measure establishes permanent new spending programs, trillion dollar deficits would never go away.
The projected deficits dwarf last year's $455 billion -- the current record.
House Budget Committee Chairman John Spratt, a South Carolina Democrat, said the new CBO deficit forecast represented "a grim epitaph for the Bush administration," which inherited a surplus in 2001.
In coming months, Congress will be asked to approve tens of billions of dollars for the wars in Iraq and Afghanistan which have so far cost $857 billion, further adding to the deficit.
This year's deficit also swelled in part because of a $240 billion rescue of mortgaging financing companies Fannie Mae and Freddie Mac and a tax rebate, part of a 2008 stimulus package which will cost $168 billion over two years.
The Bush administration has loaned hundreds of billions of dollars to rescue financial institutions from risky real estate investments that went sour. Domestic automakers also are getting assistance from Washington.
The bailouts could cost the government $184 billion this year and $5 billion next year, the CBO projected. So far, the Treasury Department has spent about half of the $700 billion authorized by Congress.
CBO also estimated deficits over the next five years will total $1.972 trillion.
When Bush took office, total U.S. debt was $5.7 trillion. It now stands at more than $10.6 trillion because of increased government spending, tax cuts and the recession.
(Additional reporting by Caren Bohan, editing by David Wiessler and Alan Elsner)