The grim CBO estimate released Wednesday also forecasts that the economy will shrink by 2.2 percent this year, the unemployment rate will pass 9 percent early next year and that the national average price of a home will drop an additional 14 percent between the third quarter of 2008 and the second quarter of 2010.
“The sharp downturn in housing markets across the country, which undermined the solvency of major financial institutions and severely disrupted the functioning of financial markets, has led the United States into a recession that will probably be the longest and the deepest since World War II,” the report’s introduction reads.
The gloomy figures reflect sliding tax revenues due to the recession and about $400 billion to bail out the financial industry and take over Fannie Mae and Freddie Mac, according to the Associated Press.
The $1.19 trillion deficit figure for 2009 breaks the previous record of $455 billion, set 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.
Senate GOP 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.”
The bleak CBO report comes a day after President-elect Barack Obama warned of “trillion-dollar deficits for years to come.”
Obama and congressional leaders are promising quick enactment of a new economic recovery plan, which could include up to $300 billion in tax cuts and big new spending programs that could cost up to $775 billion over the next few years.
While expected, the new deficit numbers may give lawmakers pause about creating new spending programs. And it is likely to stir debate about whether tax increases are necessary after the economy recovers from the current recession.
The CBO predicts the deficit will come under relative control within a few years. The agency said the deficit will likely fall to $703 billion in the 2010 fiscal year which begins Oct. 1, 2009, as the U.S. recession begins to ease in the second half of this year.
The budget gaps could rise, however, as Congress enacts a large economic stimulus measure and may also hinge on how the Obama administration handles the expiration of President Bush’s tax cuts at the end of next year.
President-elect Obama has said he fears double-digit unemployment if Congress doesn’t act fast on an stimulus bill that he hopes would create or maintain 3 million jobs.
On Wednesday, Mr. 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.”
“Despite the record deficits facing us, our number one task is an economic recovery package,” House Budget Committee Chairman John Spratt Jr., D-S.C., said of the numbers. “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.”