AP source: White House projects lower deficit

[August 20, 2009]  WASHINGTON (AP) -- The federal budget picture will look slightly better next week. Relatively speaking.

The White House plans to announce the federal deficit will still be a record breaker, at $1.58 trillion, for the current 2009 fiscal year. But the amount is about $262 billion less than officials predicted earlier this year.

That's mostly because the administration erased a $250 billion contingency fund it had penciled into the budget in case Wall Street needed more government help in getting out of the financial crisis.

While the numbers still represent a tremendous amount of red ink, they would give the administration the opportunity to say its policies have prevented a more extreme financial crisis and eliminated the need for further bank infusions.

Nonetheless, the deficit amount is a huge obstacle for an administration trying to undertake massive policy overhauls in health care and the environment. And the true impact of deficits lies in the coming years.

A slow recovery from the recession, as many economists predict, could test Obama's goal of cutting the deficit to $512 billion in 2013 and pressure him to call for deep spending cuts or increases in revenue through tax hikes.

Even at $1.58 trillion, the deficit this year would be three times larger than last year. A White House official, speaking on the condition of anonymity to discuss the report before its release Tuesday, said the report for the budget year that ends Sept. 30 also will predict Washington will spend $3.653 trillion this year. Revenue, however, would reach only $2.074 trillion.

The nonpartisan Congressional Budget Office is expected to release its mid-session review on Tuesday as well. It estimated in June that it expected a deficit of $1.825 trillion.

"Whether it's $1.6 trillion or $1.8 trillion, it's pretty bad," said Robert Bixby, executive director of the bipartisan fiscal watchdog The Concord Coalition. "I hope no one tries to spin that as good news."

Stan Collender, a former congressional budget official, said the White House's new deficit numbers can't be blamed on Obama. Collender, now with Qorvis Communications, a Washington consulting firm, said that when President George W. Bush left office the deficit estimate for this fiscal year was $1.2 trillion, and that didn't include a tax adjustment and additional spending for operations in Iraq and Afghanistan, approved this year, that Bush also would have sought.

The midsummer report was supposed to have been released in mid-July, but was delayed, leading to speculation that the White House was delaying the bad news until Congress left town for its August recess. Other administrations have delayed releasing their versions of this report during their first year.

Obama's budget had included a $250 billion placeholder for a second bailout of the nation's troubled banks but did not ask Congress for it amid concerns the administration was spending too heavily. The administration also had anticipated more banks failing. Instead, banks have begun paying back some of the government bailout money earlier than anticipated.

The report comes during a rough patch for Obama's presidency: the rancor surrounding the Democrats' proposed health care overhaul.

The administration earlier this year predicted that unemployment would peak at about 9 percent without a big stimulus package and 8 percent with one. Congress passed a $787 billion, two-year stimulus measure, yet unemployment soared to 9.4 percent in July and appears headed for double digits. Most of that stimulus will occur in the coming 2010 fiscal year.

The nation's debt now stands at $11.7 trillion. In the scheme of things, that's more important than talking about the "deficit," which only looks at a one-year slice of bookkeeping and ignores previous debt that is still outstanding.

Economists predict that an improved economic climate could help reduce the deficit in the 2010 fiscal year to $1.3 trillion, though White House economists had forecast a slightly smaller figure of $1.26 trillion. Obama's promise to reduce the budget deficit to $512 billion in the 2013 fiscal year was based partly on an optimistic economic recovery forecast and by anticipating less spending on Iraq and Afghanistan.

"The deficit is obviously very large and a problem," said economist Mark Zandi of Moody's Economy.com. "But it's not quite as bad as what expectations were a few months ago."

Earlier this year, Zandi, whose observations are frequently cited by administration and congressional officials, had predicted that the administration would have to get congressional approval for additional rescue funds for financial institutions.

"It's working out better than I anticipated," he said.

[Associated Press; By JIM KUHNHENN and PHILIP ELLIOTT]

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