WASHINGTON - The U.S. federal budget deficit will hit an unprecedented $1.2 trillion for the 2009 budget year, according to grim new Congressional Budget Office figures.
The eye-popping estimates reflect plummeting tax revenues because of the recession and about $400 billion to bail out the financial industry and take over Fannie Mae and Freddie Mac.
Last year's deficit was $455 billion.
The CBO estimate released Wednesday also sees the U.S. economy shrinking by 2.2 per cent this year and recovering only slightly in 2010, and the unemployment rate eclipsing 9 per cent early next year unless the Obama administration steps in.
"The recession -- which began about a year ago -- will last well into 2009," the CBO report says. The agency said "the ongoing turmoil in the housing and financial markets has taken a major toll on the federal budget."
The dismal figures come a day after president-elect Barack Obama warned of "trillion-dollar deficits for years to come."
CBO's figures don't account for the huge economic stimulus bill Obama is expected to propose soon to try to jolt the economy.
The shrinking economy has led to a sharp drop in estimated tax revenues of $166 billion, which is largely responsible for the deficit, along with big outlays from the Wall St. bailout.
The agency expects the $700 billion bailout to actually cost taxpayers $189 billion, with the costs reflected in its estimates for this year and next. CBO estimates take into account the net value of the assets the government holds from financial institutions.
Under Treasury Department accounting, the bailout is reflected on a cash basis with disbursements reflected as the government makes them; as of mid-December, those disbursements totaled $238 billion.
Exposure to the taxpayer stemming from the Federal Reserve Board's extensive interventions in the financial markets -- such as acquiring 80 per cent control of insurance and financial giant American International Group Inc. -- are not reflected in the estimates.
The CBO report also said the federal takeover of Fannie Mae and Freddie Mac last year added $218 billion to this year's deficit.
Obama and Congress are promising quick enactment of the economic recovery plan, which will blend up to $300 billion in tax cuts with big new spending programs and could cost up to $775 billion over the next few years.
The flood of red ink probably won't affect that measure but could crimp other items on Obama's agenda.
"Despite the record deficits facing us, our No. 1 task is an economic recovery package," said John Spratt, a South Carolina Democrat who is budget committee chairman for the House of Representatives.
"With Americans concerned about their jobs, their homes, their retirement and their children's future, our economic situation is so severe that stabilizing the economy must take precedence over short-term deficits."
The $1.19 trillion 2009 figure shatters the previous record of $455 billion, set only last year. It also represents more than eight per cent of the size of the economy, which is higher than the deficits of the 1980s. The 2009 budget year began last Oct. 1.
Senate Republican Leader Mitch McConnell of Kentucky 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 within five years. 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.
