Obama inherits $1.2 trillion deficit – even before new stimulus

President-elect Obama and his team are about to inherit the biggest federal deficit since World War II – or the biggest ever, depending on how you measure it. Then, they’re going to propose adding almost a trillion dollars in new stimulus spending on top of that.

That’s why Mr. Obama is trying to convince voters that they can trust him with the US government’s checkbook.

So far this week, he’s warned of the dangers of federal red ink to come and named a “chief performance officer,” who will try to wring waste and inefficiency out of Washington’s budget.

Of course, for the incoming administration, attempting in advance to develop a reputation for fiscal prudence is probably a political necessity. For fiscal year 2009, which began this past Oct. 1, the federal government will run $1.2 trillion in the red, said the Congressional Budget Office (CBO) in a dire projection released Jan. 7. That’s without counting any Obama stimulus spending, since such a package has yet to be formally proposed, much less passed.

And that stimulus package could still face a difficult time in Congress if fiscal conservatives can successfully define its author as just a traditional big-spending Democrat in new clothes.

“In order to make these investments that we need, we will have to cut the spending that we don’t,” Obama said at a Jan. 7 news conference.

Nancy Killefer, director of a management-consulting firm and former assistant secretary of the Treasury, will serve as the chief performance officer. She will work with the Office of Management and Budget to streamline processes throughout the government and help agency heads better manage their people and money, according to transition officials.

“Government has the capacity to deliver services more efficiently and effectively,” said Ms. Killefer at the news conference. “I’ve seen it done.”

Announcement of her appointment followed a Jan. 6 warning from the incoming president about the state of the deficit. The US faces the prospect of trillion-dollar shortfalls for years to come, said Obama after meeting with his economic team.

But long-term fiscal discipline can help offset the short-term need for recovery spending, said Obama. He signaled that trimming the big US entitlement programs – Social Security, Medicare, and Medicaid – might be needed to help wrestle the federal budget into line.

By February, “we will have more to say about how we’re going to approach entitlements spending,” Obama said.

Obama’s professions of fiscal prudence might have been an attempt to draw some of the sting from the new CBO deficit predictions. In dollar terms, the $1.2 trillion deficit would be more than double last year’s and the biggest ever. Measured as a percentage of the US gross domestic product (which is how most economists do it, since it shows affordability) it is the largest deficit since World War II.

“The federal fiscal situation in 2009 will be dramatically worse,” concluded CBO.

About $180 billion of the $1.2 trillion deficit will be due to federal spending under the Treasury Department’s Troubled Asset Relief Program. Some $240 billion will be due to US efforts to bail out mortgage giants Fannie Mae and Freddie Mac.

Given the unknown way in which these efforts will proceed and further federal economic-recovery efforts as yet unpassed, the federal budget has entered unprecedented territory, noted CBO.

“The scale and novelty of federal intervention ... and uncertainty about the degree to which those interventions will affect the economic outlook, make it particularly difficult for analysts to use historical patterns to forecast the near future,” said CBO.