Federation of Connecticut Taxpayer Organizations

Short of wartime mobilization, it�s no exaggeration. The Congressional Budget Office released its latest Budget and Economic Outlook today, and it looks like the credit collapse and attendant bailout mania are taking an even greater toll on the federal fisc than expected. Undercounting the TARP (CBO included only $180 billion of its cost) and not including expected big-ticket stimulus legislation, CBO projects a 2009 deficit of $1.186 trillion dollars, or 8.3 percent of GDP. Since 1930 (the earliest data I have) there have only been four years when the deficit was greater than 8.3 percent of GDP and they were the World War II years of 1942 through 1945, when the federal government was selling war bonds to defeat Nazism and Japanese imperialism.

This staggering deficit is almost entirely a consequence of skyrocketing federal spending, not of falling revenues due to the financial crisis. Revenues are projected to fall $166 billion dollars from 2008 to 2009�an otherwise large number that looks puny in this context. Spending, on the other hand, is on course to jump by $570 billion this year, or 36 percent. As a percentage of GDP, federal spending will set a new record of 24.9 percent (only exceeded in the same four World War II years of 1942 to 1945).

If that�s not daunting enough, bear in mind that it�s a big time lowball. To start with, the TARP law required CBO to score expenditures under the program on a net-present value basis, which means they are supposed to estimate how much all the preferred shares that Treasury Secretary Hank Paulson has been buying up are really worth, subtract that from what he paid for them, and record that as the cost to taxpayers. That�s how they got the $180 billion figure, and it�s the procedure the TARP law required them to use. But we really have no idea what these assets are worth, and from a cash-flow perspective, the full purchase price is what�s headed out the door. With about $220 billion of TARP funds having left the building before 2008 ended, that means the real outlays for TARP in 2009 will be about $480 billion, or $300 billion more than the CBO baseline includes.

That�s takes the deficit from $1.2 trillion to $1.5 trillion.

Then there�s the matter of the fiscal stimulus bill, an unprecedented hodge-podge of big-government spending programs and tax subsidies, including billions in so-called rebate checks to people who paid no taxes in the first place. President-elect Obama has proposed a stimulus plan of $775 billion, but acknowledged today that it could end up being as much at $1.3 trillion. However it develops, and even if it�s split between this year and next year, it�s safe to predict that we�re looking at a 2009 deficit upwards of $2 trillion.

A $2 trillion deficit is staggering to contemplate. For some perspective, consider that the first time the federal government ever spent a total of $2 trillion in a year was 2002, just 7 years ago. As a percentage of GDP, a $2 trillion deficit will be about 14 percent of the CBO�s estimate of $14.2 trillion. If the economy deteriorates further, which is possible, the deficit could go even higher. That�s well more than double the largest deficit we�ve ever seen outside of World War II, which was 6 percent of GDP in 1983.

Proponents of even bigger spending and taking on more debt will tell us that all is well. This is a different economy; bigger and better government spending will prevent the worst of our economic woes. Interest rates are at historic lows, so we should borrow as much now as we can and spend our way back to prosperity.

The unfortunate reality is that borrow and spend is precisely the problem in our financial crisis, not the solution. American households and governments have been on a leveraged spending binge, financing huge consumption expenditures with debt that must eventually be repaid. Not all debt is created equal. Taking on debt to invest in production makes sense, because the wealth produced can pay off the debt and then some. Taking on debt to spend on consumption just sets up a day of reckoning because the debt has to be repaid from future income.

As the world viciously deleverages, the one thing keeping the U.S. afloat and those interest rates low is that we look like the least-bad place to put capital. Eventually the staggering debt we�re running (not to mention the off-balance sheet obligations of programs like Social Security and Medicare, slated, by the way, for an 8 percent spending increase in 2009) will have to be repaid. That means steeply higher taxes or the monetization of debt�which we�re already seeing via Federal Reserve action�triggering hyperinflation.

The only way the federal government could actually limit the impending carnage would be to aggressively cut key supply-side tax rates, removing the barriers to formation and efficient allocation of capital like the corporate tax, the capital gains tax, and the death tax. Big supply-side tax cuts would facilitate investment in the economy�s productive capacity, creating more wealth to pay down the debt on household, corporate, and government balance sheets. Supply-side tax cuts would therefore be less damaging to the federal budget outlook than the current so-called stimulus plans.

Unfortunately, given political reality, 2009�s reign as the worst budget year ever might only last until next year.

Mr. Kerpen is director of policy for Americans for Prosperity.