The US is about to end this fiscal year with a $407 billion budget deficit that is more than double what it was in 2007 – and the red ink is projected to flow on.
Even before the full cost of the government takeover of Fannie Mae and Freddie Mac is calculated, the Congressional Budget Office (CBO) projects that the nation will add more than $2.3 trillion to the national debt over the next 10 years.
This updated CBO report, released Tuesday, is the latest sign that the next president will face tough fiscal choices early on in a new administration. But it's already prompted even tougher rhetoric in Congress – and on the campaign trail – over who is to blame for all the red ink.
"This Democratic Congress really does deserve the name "Do Debt, Do Deficit, and Do Nothing," said Sen. Judd Gregg (R) of New Hampshire, the ranking Republican on the Senate Budget Committee in a briefing after the release of the CBO update.
With the new fiscal year set to begin on Oct. 1, Congress has yet to pass a single appropriations bill, he said. "So essentially the business of operating the government from day-to-day has been abdicated by the Democratic leadership," he added.
Sen. Kent Conrad (D) of North Dakota, who chairs the Senate Budget Committee, shot back: "[Republicans] are the architects of the economic fiasco that has brought us to where we are at this moment," he said.
"Under their watch and under their control, we have a housing crisis, an energy crisis, a health care crisis, and a fiscal crisis," Mr. Conrad said. "This is a combination of mismanagement that will take years to undo."
What's driving deficits is "an unusual amount of turbulence" in the US economy this year, including depressed housing markets, fragile financial markets, and soaring prices for energy and food, along with the cost of war, according to the CBO. But the biggest long-term threat is rising health care costs and the retirement of the "baby boom" generation.
"As we have said over and over in the past, the nation is on an unsustainable long-term fiscal course driven primarily by rising health care costs," said CBO director Peter Orszag at a briefing on Tuesday. "And that does need to be addressed before a crisis hits,"
One of the first decisions a new president will have to make is whether or not to extend President Bush's tax cuts, now set to expire in 2010.
CBO projections are based on the assumption that all expiring tax provisions will be allowed to expire and that Congress will not again pass legislation to curb the impact of the Alternative Minimum Tax on millions of middle-class families.
If these tax cuts are not allowed to expire – the CBO's "Alternative Budget Scenario" – the deficits get worse.
The nonpartisan Tax Policy Center estimates that the Obama plan would cut taxes by $2.9 trillion over 2009-2018; the McCain plan would reduce taxes by nearly $4.2 trillion.
Although Washington's capacity to ignore fiscal warnings is well established, budget analysts say that the news is now sufficiently alarming, especially the fallout from the housing crisis, that it could set off a national wake-up call.
"You'll hear a lot of excuses, such as: 'It's a slow economy, so there's nothing we can do about it.' It's convenient for politicians to find reasons why they can't possibly do anything, particularly in a campaign season," says Robert Bixby, executive director of the Concord Coalition, a public interest group that calls for fiscal responsibility.
But the fiscal fallout of the government takeover of Fannie Mae and Freddie Mac could grab public attention – and force politicians to take note.
"It has the potential to wake people up, because it could get bad," says Mr. Bixby. "That gets the public sufficiently aware of the government's precarious financial situation that people will force the government to do something."
Politicians and the public often ignore expected drains on the budget that just get worse. But a jolt to the system, such as the savings and loan crisis in the late 1980s, can change things politically.
"It linked the budget deficit with their daily lives, and that's the sort of thing that can get politicians to pay more attention," says Bixby.
CBO director Orszag says it's not possible to estimate how much the Fannie Mae and Freddie Mac takeover will add to government deficits. The key question will be how Congress and the White House Office of Management and Budget measure the companies' assets and liabilities when releasing its budget early next year.
"Politically, it may make a difference that in the first year the [new] president is in office we're going to have a deficit that is somewhere over $500 billion," says Jim Horney, director of federal fiscal policy at the Center on Budget and Policy Priorities.