The Deficit Train Picks Up Steam

The latest projections show the federal government will have a more than $400 billion deficit this year. And next year. And the year after that.

In fact, the new Congressional Budget Office projections show the federal government running a deficit for the next ten years. This year they're projecting the deficit will be $407 billion, with further deficits of $438 billion in 2009 and $431 billion in 2010.

After that, the deficits are supposed to get smaller, but only because the CBO is required by law to assume that the Bush tax cuts expire on schedule in 2010. They may be required to assume that, but you shouldn't. Both presidential candidates have already pledged to extend the tax cuts in some form – John McCain wants to extend them entirely, and Barack Obama says he'll extend at least the cuts for middle-class taxpayers.

That's not the only assumption you shouldn't take at face value here. The CBO acknowledges that it didn't have time to consider the impact of the huge mortgage bailout of Fannie Mae and Freddie Mac, which could cost anywhere from $25 billion to $200 billion, depending on how it plays out. And there are some other fires that may need to be put out with bales of federal money, such as bailouts of strained state unemployment funds or the troubled auto industry.

The short-term situation is mostly about the economy. The CBO is estimating measly economic growth over the next two years and unemployment at six percent, which means tax revenues are going to drop. These government bailouts are driven by the need to keep things from getting worse. If the short-term problem was the only problem, then this wouldn’t be all that bad – eventually the economy will turn around.

But the long-term outlook remains, to use the CBO's favorite word, "unsustainable." The combination of rising health care costs and aging baby boomers are going to drive up the cost of Medicare and Social Security until they bust the budget. Plus, every time the government runs a deficit, coming up short in a given year, it has to borrow the money to cover its bills. That adds to the national debt, which is already past a staggering $9.5 trillion – and these projected deficits will add another $1.4 trillion to that over the next five years.

All this means that the next president is going to be working with some serious fiscal constraints which in fact may turn out to be one of the defining factors for the new administration. That's going to be true no matter who wins – and whether or not they're ready to acknowledge it.