Thread: Recession, housing seen increasing budget deficit for new president

Recession, housing seen increasing budget deficit for new president

Posted Aug 20th 2008 3:28PM by Joseph Lazzaro

Few would deny that the new U.S. president, Democrat or Republican, will face a plethora of concerns and problems after reciting the oath of office in January 2009.

One issue that sort of presents the 'problems panorama' in a snapshot has, curiously, received light news coverage lately -- is the U.S. budget deficit.

Time was, just a short decade ago, the federal budget was in surplus. However, in 2001 a federal tax cut occurred. That fact, combined with required spending for the war on terror / Iraq War, and the absence of a tax increase to pay for that increased spending, has primarily led to a projected $553 billion deficit for fiscal 2008, which ends September 30, 2008, and a $403 billion deficit for fiscal 2009, which begins October 1, 2008, according to Congressional Budget Office research (pdf).

Three factors that could balloon the deficit

In the view of many, the existing deficit is large -- but still manageable -- in the context of a $2.9-3.0 trillion federal budget. However, three factors could markedly increase the budget deficit in the immediate years ahead, and in doing so add to the new president's woes, economist Richard Felson told BloggingStocks.

First, there's the U.S. economy. If it falls into a recession (if it hasn't already), federal receipts (such as corporate and individual income taxes) will decline from current projected levels, and social program costs will increase, "adding $20-$50 billion to the deficit," Felson said.

Second, the housing rescue / bailout package that Congress passed and President Bush signed earlier this summer could be more costly for the federal government, depending on the number of homeowners helped with mortgages, Felson said. That could add another $40-70 billion the deficit.

Third -- and this is the biggest unknown -- using taxpayer money to help Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE), which own or back about 42% of the U.S. home mortgage market, "could take the deficit to its highest percent of U.S. GDP since World War II," Felson said. Felson estimated that a minimum bailout of Fannie and Freddie would require about $100-$125 billion, but he qualified that by saying it's "extremely difficult to calculate the cost until we know how much bad debt Fannie and Freddie own."

Add the three up and that's an additional $160-$245 billion in obligations, which would bring the new president's budget deficit "to $563-648 billion, give or take $10 billion or so in fiscal 2010, which is one heck of a 'welcome present' for a new president," Felson said.

During a low point in his presidency, someone asked President John F. Kennedy if he still enjoyed the job despite its problems and challenges, most of which, as is the case with almost all presidents, were not his making. President Kennedy quipped that he did, "because the pay was pretty good, and besides, I can walk to work."

Let's hope the new president also has a sense of humor.