CBO sees record $1.2 trillion '09 deficit

The $1.19 trillion 2009 figure shatters the previous record of $455 billion, set only last year. It also represents more than 8 percent of the size of the economy, which is higher than the deficits of the 1980s. The 2009 budget year began last Oct. 1.

Just in September, CBO predicted a 2009 deficit of $438 billion, but revenue projections have dropped by $362 billion on top of the approximately $400 billion federal intervention in the financial system.

Senate Republican Leader Mitch McConnell called the budget figures "a stunning and sobering reminder that Congress must strengthen its efforts to be good stewards of the taxpayers' money."

CBO predicts the deficit will come under relative control within a few years, dropping to the $250 billion range by 2012. But such predictions depend on the expiration of President George W. Bush's tax cuts at the end of next year; Obama has promised to renew most of them except for those aimed at people making more than $250,000 a year.

Fully renewing the Bush tax cuts, as well as indexing the alternative minimum tax for inflation, would add $380 billion to a deficit otherwise projected at $327 billion for 2012, CBO says.

At the same time, Democrats are expected to increase domestic agency budgets as they complete the leftover 2009 spending bills, and Obama is likely to recommend further increases in next month's budget submission.

While expected, the deficit numbers will give lawmakers second thoughts about creating new spending programs without finding ways to pay for them. And it is likely to prompt a debate about whether tax increases are necessary after the economy recovers from the current recession.

On Wednesday, Obama said, "Unless we take decisive action, even after our economy pulls out of its slide, trillion dollar deficits will be a reality for years to come."

"I'm going to be willing to make some very difficult choices in how we get a handle on this deficit," Obama said Tuesday.

Economists warn that large and sustained budget deficits put upward pressure on interest rates. In the short term, however, efforts to restrain the deficit could have a contracting effect on the economy.

"As we address our economy, it is vital that we simultaneously take steps to put our budget back on a sound long-term fiscal path," said Senate Budget Committee Chairman Kent Conrad.

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