Report: U.S. $1.2 Trillion In The Hole

President-elect Barack Obama meets with members of his economic team at his transition office in Washington, Monday, Jan. 5, 2009. (AP Photo/Gerald Herbert) AP Photo/Gerald Herbert

The U.S. federal budget deficit will hit an unparalleled $1.2 trillion for the 2009 budget year, according to a Capitol Hill aide briefed on new Congressional Budget Office figures.

The aide says the CBO also sees a $703 billion deficit for 2010.

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 that Mr. Obama is expected to propose soon to try to jolt the economy. At the same time, they do not reflect the immediate cost of the Wall St. bailout.

The shrinking economy has led to a sharp drop in tax revenues, which is largely responsible for the deficit, along with about $350 billion in spending so far for the Wall St. bailout.

Mr. Obama announced Wednesday the appointment of Nancy Killefer as White House chief performance officer, a new post created to increase government efficiency - one of Mr. Obama's campaign pledges.

Obama said that concerns about rising deficits prompted him to turn down advice from some economists who called for spending $1 trillion or more to jump-start the economy. Obama's proposal is expected to cost nearly $800 billion over two years.

"We have an economic situation that is dire, and we're going to have to jump start this economy with my economic recovery plan, creating 3 million jobs," he said. "That's going to cost some money. And in the short term, we will actually see, potentially, additions to the deficit."

There are also signs that the stimulus bill could become a magnet for good old fashioned pork-barrel spending, reports CBS News correspondent Chip Reid. Mr. Obama has banned congressional pet projects, so the lobbying has shifted to the states and cities.

A wish list from the U.S. Conference of Mayors includes three aquatic centers in Miami for $30 million, a polar bear exhibit in Rhode Island for nearly $5 million, and a museum on the mafia in Las Vegas for $55 million, Reid reports, which are the kinds of projects that could jeopardize Republican support.

Mr. Obama also said that by February he expects to have a plan on how to deal with big ticket spending such as Social Security and Medicare, waste in government and other factors, as well as some "specific outlines" on how to control the deficit.

"We're going to be inheriting a $1 trillion-plus deficit. And if we do nothing, then we will continue to see red ink as far as the eye can see," Obama said after introducing Killefer, who will become the White House's point-person to work with federal agencies to set performance standards and hold agency managers accountable for progress.

Obama called Killefer, who will work out of the White House Office of Management and Budget, "an expert in streamlining policies and wringing out inefficiences."

Mr. Obama and Congress are also 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 Mr. Obama's agenda.

The $1.19 trillion 2009 figure shatters the previous record of $455 billion, set only last year. It also represents about 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.

CBO predicts the deficit will come under control within a few years, but such predictions depend on the expiration of President George W. Bush's tax cuts at the end of next year and repayments from financial institutions that received bailout funds.

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 Tuesday, Mr. Obama issued his most serious remarks yet about the danger of big budget deficits and promised his administration will take steps to bring the tide of red ink under control.

"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.
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