Deficit zooming to new record of half trillion for fiscal year 2009 - Impact of Iraq War

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WASHINGTON - The White House predicted yesterday that President Bush would leave a record $482 billion deficit to his successor, a sobering turnabout in the nation's fiscal condition from 2001, when Bush took office after three consecutive years of budget surpluses.

The worst may be yet to come. The deficit announced by Jim Nussle, the White House budget director, does not reflect the full cost of military operations in Iraq and Afghanistan, the potential $50 billion cost of another economic stimulus package, or the possibility of steeper losses in tax revenues if individual income or corporate profits decline.

The new deficit numbers also do not account for any drains on the national treasury that might result from further declines in the housing market. The White House forecast was prepared before passage of the huge housing assistance package that Bush has promised to sign. That legislation would put taxpayer money at risk in numerous ways, especially if housing prices continue to decline.

Next year's record figure includes only $70 billion for the wars in Iraq and Afghanistan, which could cost three times that much, and it is based on economic assumptions that could prove unrealistic. The White House is assuming economic growth next year of 2.2 percent, down sharply from the 3 percent estimate of February but still brighter than the 1.7 percent growth estimate of many private-sector economists. The White House is also assuming rosier numbers for inflation and unemployment rates. "That's not the real number," former Bush Treasury secretary Paul H. O'Neill said of the $482 billion deficit forecast. "It's upward of $500 billion and counting. It's a mind-boggling number."

Nussle predicted yesterday that the deficit would more than double in the current fiscal year - to $389 billion, from $162 billion in 2007 - before shooting up to $482 billion in fiscal 2009, which begins in about two months. "We are not happy about the deficit," Nussle conceded.

The deficit projected for 2009 would be the largest in absolute terms, easily surpassing the record of $413 billion in 2004. The White House and many economists prefer to measure the deficit as a share of the economy. Measured against the size of the economy, next year's mark is still eclipsed by the deficits of Bush's first term, as well as the deficits of George H.W. Bush and Ronald Reagan. The projected 2009 deficit would be 3.3 percent of the economy. That is the largest share since 2004, but well below the percentages recorded in the 1980s and early 1990s. In 1983, the deficit was 6 percent of the overall economy.

The new estimate of the 2009 deficit was $74 billion higher than Bush and Nussle had predicted in the president's budget six months ago. Bush had expected the impact of the tax rebates and war funding to begin subsiding in 2009, reducing the deficit by $3 billion. Instead, Nussle said, the slowing economy will push the deficit to a level that would easily beat the record $413 billion deficit of fiscal 2004.

The bleak outlook for the budget will crimp the ability of the next president to carry out ambitious spending plans. And it adds to fiscal pressures that were already building because of the growth of Medicare and Social Security.

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Photos courtesy of Brendan Smialowksi / Bloomberg News, AFP, Stuff.co.nz

Original Source: Boston Globe and Washington Post