Near-record deficit feared

The federal government will run a near-record deficit of $407 billion this year, according to the latest Capitol Hill estimates.

The Congressional Budget Office released figures Tuesday that indicated the red ink will spill over into next year, when the deficit could reach a record $438 billion -- and might go even higher as the government takes over mortgage giants Fannie Mae and Freddie Mac.

The worsening deficit is largely due to continuing weakness in the economy, high energy and food prices, and the slump in the housing and financial markets, the report said. And the economy could still slide into a recession.

“The economy is likely to experience at least several more months of very slow growth,” the report said. “Whether this period will ultimately be designated a recession or not is still uncertain, but the increase in the unemployment rate and the pace of economic growth are similar to conditions during previous periods of mild recession.”

The budget office predicts that the economy will grow 1.5% this year in real terms and slip to just 1.1% growth in 2009.

The nonpartisan agency, which makes economic and budget estimates for Congress, also sees unemployment averaging 6.2% next year.

The budget office’s figures for this fiscal year, which ends Sept. 30, are slightly worse than the White House predictions released in July. The White House foresees a $389-billion deficit for 2008, growing to $482 billion in 2009.

If Congress alters the alternative minimum tax to exempt middle-class families, next year’s deficit could rise another $60 billion or so.

And Democratic efforts to pass a second economic stimulus bill to follow the tax rebate checks sent out this year would add another $50 billion or so to next year’s deficit.

The White House and congressional Republicans are resisting the move and instead want Congress to pass other pieces of legislation, such as free-trade agreements with Panama, Colombia and South Korea, to help the economy.

The new $400-billion-plus deficit numbers represent about 3% of the economy, which is the deficit measure seen as most relevant by economists. That’s considerably smaller than the deficits of the 1980s and early 1990s, when Congress and earlier administrations cobbled together politically painful deficit-reduction packages.

In dollar terms, the record is the $413-billion deficit recorded in 2004.

Still, the new dollar figures are so eye-popping that they could restrain the appetite of the next president, who takes office Jan. 20, from adding expensive spending programs or new tax cuts.

Pressure may build to allow some tax cuts enacted in 2001 and 2003 to expire as scheduled at the end of 2010.