Federal billions for Wall Street will handcuff next president

McClatchy NewspapersSeptember 19, 2008 

WASHINGTON — The next president will take office in January with little hope of getting his pet programs enacted quickly, if at all, because of already-massive budget deficits likely to balloon even further from the hundreds of billions expected to be used to bail out Wall Street.

"The next president is just not going to have the money to meet his promises," said Maya MacGuineas, the president of the Committee for a Responsible Federal Budget, a nonpartisan budget-research group.

Democratic nominee Barack Obama and Republican rival John McCain have big plans that would add substantially to the deficit.

By 2013, when his changes would be fully implemented, Obama would boost the deficit by $360 billion with his tax cuts and by another $65 billion with his health-care plan while partially offsetting that with $139 billion saved through winding down the Iraq war and making other spending cuts, according to US Budget Watch, a nonpartisan research group.

McCain's tax cut plan would add $417 billion to $485 billion to the deficit, while his health-care policies would cost another $54 billion to $65 billion. Iraq troop reductions and "unspecified cuts to balance the budget" could save $291 billion to $304 billion, however.

The bottom line: Both would sharply increase the deficit, which already is headed to record territory.

"They've got to be asleep not to see this is bad news," said David Walker, the president and chief executive officer of the Peter G. Peterson Foundation, which promotes sound fiscal policy.

The Congressional Budget Office has estimated that the deficit for fiscal 2008, which ends Sept. 30, will rise to $407 billion, while next year's figure could hit $438 billion, shattering the record of $413 billion in fiscal 2004.

The 2008 and 2009 numbers are conservative estimates, since they don't include the federal bailouts of mortgage giants Fannie Mae and Freddie Mac or failed insurer American International Group.

Friday, the government unveiled what's likely to be the most expensive twist of all: a still-evolving plan to create a way for the government to buy troubled bank assets, probably the biggest bailout in U.S. history.

"We're talking hundreds of billions" of dollars, Treasury Secretary Henry Paulson said.

As a result, "what was already a very difficult decision for the next president _how to deal with taxes and spending — has now become extremely difficult," said Brian Riedl, senior policy analyst at Washington's Heritage Foundation, a conservative research group.

Traditionally, the first few months of a new presidency are the White House's most successful. Ronald Reagan won approval of his 25 percent, three-year tax cut in July 1981. Bill Clinton saw his $496 billion five-year deficit-reduction plan pass in August 1993, and George W. Bush got his $1.35 trillion tax cut through Congress in May 2001.

McCain and Obama are touting ambitious efforts to revamp health care and provide tax breaks.

Add to that billions in new spending. McCain would increase funding to the No Child Left Behind education program, which would cost an estimated $13 billion in 2013, and would boost the size of the military, a $10 billion plan. Obama also would spend more on education — an estimated $18 billion — would create an "infrastructure reinvestment bank" for $6 billion, would double foreign aid — a $25 billion expense — and increase the size of the military, which would carry a $20 billion price tag.

Getting any expansion of health care will be particularly tough, MacGuineas said. "There's no bigger budget buster than health care," she said, as Medicare and Medicaid costs are projected to continue increasing steadily.

Both candidates want to preserve at least some of the tax cuts that are due to expire Jan. 1, 2011. McCain would keep all the key cuts, while Obama would end most of those that affect individuals who earn more than $200,000 a year and families that make more than $250,000.

"While Barack Obama recognizes the need to take swift and systemic action to shore up the financial system, he also understands that we face a broader economic crisis that demands the kind of fully paid for, pro-growth economic plan that he has put forward, which will cut middle-class taxes, jump-start job growth and help turn our economy around," said Obama campaign spokesman Nick Shapiro.

Analysts think the candidates eventually may be able to get some of their more ambitious plans enacted, but they warn that there are a lot of "ifs."

Experts agree on this much: It'll be hard to do in 2009.

"I suspect what may have been economically and politically palatable six months ago will have to be reviewed," said Doug Rediker, co-director of the New America Foundation's Global Strategic Finance Initiative.

James Horney, the director of federal fiscal policy at Washington's Center on Budget and Policy Priorities, thought that one way the new president could use his mandate is to say, "The short-term problems are worse than expected, but let's look ahead to 2012. Everything I planned still makes sense."

Looking ahead has other dangers, however, notably the rising costs of Social Security and Medicare.

There's one glimmer of hope.

David Wyss, chief economist at Standard & Poor's, recalled that when the government set up the Resolution Trust Corp. in 1989 to help ailing savings and loan institutions, "the cost was less than expected."

When the government bailed out Chrysler Corp. in 1979 with a $1.2 billion loan, it earned an estimated $300 million profit.

However, even if the government winds up in the black from this financial crisis, it's unlikely that that'll show up on next year's balance sheet. No one knows how much the bailouts will cost at first, but most see the new president as inheriting a huge deficit.

As MacGuineas put it, "It's stifling."

ON THE WEB

US Budget Watch's analysis of the McCain and Obama fiscal plans

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