Bad News on the Economy

With the economy weakening and spending on the war rising, the federal budget outlook has deteriorated in both the short-run and the medium-term, the Congressional Budget Office said Tuesday. In its summer budget update, the nonpartisan budget office said the federal deficit would likely double this year compared with last year, and remain at about 3% of gross domestic product for the next two years. For 2008 fiscal year (which ends at the end of the month), the CBO forecast a $407 billion deficit, or about 2.9% of GDP. The deficit should rise to $438 billion in 2009 and $431 billion in 2010. The medium-term projections now assume continued spending on the wars in Iraq and Afghanistan, and also assume that the 2001 and 2003 tax cuts will expire on schedule.

Unlike the February update, which showed the budget roughly in balance through 2018 under favorable assumptions, the September projection now sees deficits totaling $2.3 trillion over the next 10 years. Those projections assume that the 2001 and 2003 tax cuts expire and that the alternative minimum tax is not changed. If the tax cuts are extended as the White House and the McCain-Palin ticket want, the deficits over the next 10 years would be $4.2 trillion higher than now projected, CBO said.