News on federal deficit likely to be used against Obama's agenda

A wave of bleak news Tuesday about the stagnant economy, led by a projection that the federal deficit will grow by $9 trillion over the next decade, has given opponents of President Obama's expansive domestic agenda a new opening to attack his proposed healthcare and energy overhauls.

As part of its fiscal midyear review, the Obama administration said the new deficit estimate is $2 trillion more than it had projected in February when its budget initially was outlined.

On the same day, the nonpartisan Congressional Budget Office reported that the federal budget deficit for fiscal 2009 would soar to $1.6 trillion, which would represent 11.2% of the nation's gross domestic product.

That's the highest percentage since the end of World War II, though slightly lower than officials had projected. The government has spent less than expected on bailing out financial institutions, the CBO said.

The new estimates prompted Republicans to sound the attack on Obama's efforts to overhaul the nation's healthcare system.

Sen. John Thune (R-S.D.), who had argued that Democrats' plans would lead to government-run healthcare, called the deficit projections a "three-alarm fire warning."

"The key for the Congress is to do no harm -- to do nothing to make matters worse," Thune said.

Conservatives also cited the rising deficit as grounds for deferring action on Obama's proposals to combat global warming by reducing carbon emissions, a plan they said would raise costs to industry and farmers.

But the White House countered that the higher government spending, as well as action on healthcare and energy, are needed to help revitalize the economy.

White House Budget Director Peter R. Orszag said that the cost of the current healthcare system is a drag on the economy, and that the administration has pledged that a healthcare overhaul will pay for itself and not contribute to the growing budget deficit.

"I know there are going to be some who say that this report proves that we can't afford health reform," Orszag said. "I think that has it backwards. . . . The fiscal gap is precisely why we must enact well-designed and fiscally responsible health reform now -- health reform, again, that is deficit-neutral over the next decade and reduces it thereafter."

The culprit for Tuesday's grim projections is the economy, still mired in a recession, which has resulted in significantly lower tax revenues at the same time that federal spending has gone up sharply.

Obama has pledged to cut the federal deficit in half by the end of his first term. He inherited a $1.3-trillion annual budget deficit from the George W. Bush administration.

The White House had initially estimated that the economy would contract at about 1.4% this year, but the latest report estimates that it will actually shrink by about 2.8%.

Obama economic advisor Christina Romer said that the economy should begin to grow again in 2010, but at a 2% rate as opposed to the 3.2% originally projected by the White House. The economy should reach a healthy 3.6% growth rate in 2011, Romer said.

The unemployment rate could hit 10% this year and remain stubbornly high in the coming years -- 9.3% in 2009 and 9.8% in 2010, according to the White House projections.

The financial markets seemed to take the figures in stride, bolstering arguments that the rising deficit poses no immediate threat.

Stocks continued upward Tuesday and borrowing costs for the government remained very low, suggesting that investors still see the U.S. economy as a safe haven. The Treasury Department sold $42 billion in two-year notes Tuesday at a yield of only 1.12%.

Also, national home prices jumped for the second month in a row, the first such back-to-back growth in three years. And a widely watched measurement of consumer confidence showed its first increase since May.

Still, the deficit numbers prompted conservatives and others to complain that this was not the time to embark on new and potentially costly initiatives.

Chris Edwards, an economist for the libertarian Cato Institute, said that the Obama administration should abandon its healthcare and energy plans and "start doing things that are good for long-term economic growth."

He said that the administration had been focused on providing quick stimulus -- a "short-term sugar high" -- in the form of the $787-billion economic stimulus package and the popular, $3-billion "cash for clunkers" program, which gave car buyers discounts of $3,500 or $4,500 for replacing their gas-guzzlers with new, more fuel-efficient models.

In a sign of the increasing concern over healthcare reform initiatives, one key Republican senator, Charles E. Grassley of Iowa, sounded a pessimistic note Tuesday on the potential for passing a healthcare bill this year.

Grassley, a member of the powerful Senate Finance Committee, has been involved in extended negotiations with Democrats over a potentially bipartisan overhaul proposal. But he said Tuesday that the White House's support of a government-backed "public option" that would make health insurance available to uninsured Americans would be a deal-breaker.

"I don't think it's going to be possible to work it out with the administration because they're all over the field," Grassley said.

During town hall meetings held by members of Congress during their August recess, attendees have often cited fear of rising federal spending as a leading cause of their concerns.

"I do believe it's possible to reach an agreement," he said. "But I have to confess to you to be a little more cautious when I say that now, because I've been out here listening to my constituents."

Jim Kessler, vice president of policy for Third Way, which advocates centrist federal policies, said that he expected Republicans would try to leverage the bad economic news to imperil healthcare legislation.

"No one's surprised the deficit numbers are huge," Kessler said. "It's a hangover from the Bush administration, the stimulus, the bad economy."

Democrats also tried to use the deficit figures to their advantage.

Senate Finance Committee Chairman Max Baucus (D-Mont.), a moderate who has been working with Grassley to fashion a compromise healthcare plan, said: "Today's budget reports serve as a clear illustration that healthcare spending is out of control and threatens the healthcare programs families rely on, such as Medicare and Medicaid.

"We simply can't afford these skyrocketing healthcare costs, and that's a key reason why healthcare reform is so important," he said.

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oliphant@latimes.com

Janet Hook in the Washington bureau contributed to this report.

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