U.S budget deficit runs to near-record of $407 bln

The Congressional Budget Office figures released Tuesday say the flood of red ink will spill over into next year, when the deficit would reach a record $438 billion - and could go even higher as the government takes over mortgage giants Fannie Mae and Freddie Mac.

The CBO figures for this year are slightly worse than White House predictions released in July. The White House foresees a $389 billion deficit for 2008, growing to $482 billion in 2009.

Next years figure would also increase assuming Congress steps in to fix the alternative minimum tax, or AMT, which could add $80 billion more, according to CBO.

The numbers represent about 3 percent of the size of the economy, which is the deficit measure seen as most relevant by economists. That's considerably smaller than the deficits of the 1980s and early 1990s, when Congress and earlier administrations cobbled together politically painful deficit-reduction packages.

Still, the new figures are so eye-popping in dollar terms that it may restrain the appetite of the next president, who takes office Jan. 20, to add to it with expensive spending programs or new tax cuts. Pressure may build to allow some tax cuts enacted in 2001 and 2003 to expire as scheduled at the end of 2010, with Congress also feeling pressure to curb spending growth.

The deficit for 2007 totaled $161.5 billion, which represented the lowest amount of red ink since an imbalance of $159 billion in 2002. The 2002 performance marked the first budget deficit after four consecutive years of budget surpluses.

"Today's estimates provide the latest evidence of the fiscal legacy of Republican policies: record deficits and a weak economy," said House Budget Committee Chairman John Spratt Jr. "It’s another reminder of the dismal economy and budget that Republicans are leaving others to sort out."

Under the promises of Democratic presidential nominee Barack Obama and Republican nominee John McCain - who both say they want to extend most of the tax cuts passed in 2001 and 2003 at the urging of President Bush - the deficit is likely to remain high.

Even if all of the Bush tax cuts were allowed to expire at the end of 2010, the budget would still run a considerable deficit of $325 billion in the following year, CBO says.

The cost of extending the Bush tax cuts and other expiring pieces of the tax code, along with making sure the AMT doesnt trap more and more middle class families, would reach more than $400 billion a year by 2012, CBO says.

The worsening deficit picture is largely due to continuing weakness in the economy, CBO said. And the economy could still slide into a recession, according to the forecast.

"The economy is likely to experience at least several more months of very slow growth," the new report said. "Whether this period will ultimately be designated a recession or not is still uncertain, but the increase in the unemployment rate and the pace of economic growth are similar to conditions during previous periods of mild recession."

The nonpartisan agency, which makes economic and budget estimates for Congress, also sees unemployment averaging 6.2 percent next year.