Recession pushes U.S. budget deficit to $1.84 trillion

Let's just say it could have been worse. The White House's budget arm, the Office of Management and Budget, increased its budget deficit forecast for the current year (fiscal 2009) by $90 billion, to $1.84 trillion. Next year's estimate was also raised, to $1.26 trillion.

The new totals bring OMB's forecasts more closely in line with those from the Congressional Budget Office, Congress' watchdog, which has forecast deficits of $1.85 trillion and $1.38 trillion for the two years, respectively.

However, in revising upward the deficit estimates, the Obama administration did not revise its economic projections; those will be revisited as part of the mid-session review, Obama Administration Budget Director Peter Orzag wrote on his budget blog -- the traditional time when the administration revises its economic assumptions to reflect new information, and changed economic conditions, if they've occurred.

Based on the size of the U.S. economy, this year's deficit would total about 12.9 percent of U.S. GDP, and next year's about 8.5 percent -- well above the annual deficits economists generally consider to be healthy for an economy and a nation. Many economists say a nation's annual budget deficit shouldn't exceed three percent of GDP.

Deficit culprit: Recession, financial crisis

What propelled the downward revision? The usual suspects: weaker federal tax receipts and high costs for social safety net programs -- such as unemployment insurance. Efforts to stabilize the financial system and bail-out the beleaguered U.S. auto sector also contributed to the deficit increase. The U.S. economy contracted at a 6.3 percent rate in Q1, and will likely continue to contract through at least the end of Q2. That fact, combined with rising unemployment, and the large increase in long-term unemployed citizens, or continuing unemployment, may place pressure on the nation's social safety net, key economists agree.

Fiscal Analysis: Just a great deal to chew on in OMB's latest update. In a nutshell, about $1.1-1.2 trillion of this year's deficit is financial crisis and recession-related. The 'normalized' (and here's hoping we see 'normal' again) deficit is about $680-750 billion, roughly $150-175 billion of which is Obama administration spending increases, excluding one-time spending for the fiscal stimulus package of 2009. Of course, it may be a long time -- two, three or four years – before the budget becomes 'normalized' again, due to the bank bailout's unknown maximum cost, and the recovery timetable for the U.S. economy.

Further, like the economic recovery, the sooner Congress and President Obama tackle health care reform, including entitlement reform related to Medicare and Medicaid, the better. And there's no better evidence of the impact of the high cost of health care on the American system than what it's doing to Medicare (pdf) and Medicaid (pdf): each represents a source of large expense increases. Medicare, in particular, due to Baby Boomers reaching retirement age, has the capacity to send the budget deficit spiraling higher, even assuming balanced-budgets in discretionary spending items, hence the need to lower U.S. health care costs, system-wide and nationally.

Financial Editor Joseph Lazzaro is writing a book on the U.S. presidency and the U.S. economy.
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