Deficit to pass $482 billion; here’s how it may affect you

WASHINGTON — The government’s budget deficit will surge past a half-trillion dollars next year, according to gloomy new estimates, a record flood of red ink that could quash new spending programs and tax cuts and lead to higher consumer interest rates.

The deficit will hit $482 billion in the 2009 budget year, the White House budget office estimated Monday. That figure is sure to rise after adding the tens of billions of dollars in additional Iraq war funding it doesn’t include, and the total could be higher yet if the economy fails to recover as the administration predicts.

A $482 billion deficit would easily surpass the record deficit of $413 billion set in 2004. The White House in February had forecast that next year’s deficit would be $407 billion.

The administration said the deficit was being driven to an all-time high by the sagging economy and the stimulus payments made to 130 million households in an effort to keep the country from falling into a deep recession.

The new figures may restrain the appetite of the next president to add to the deficit with expensive spending programs or new tax cuts. In fact, pressure may build to allow some tax cuts enacted in 2001 and 2003 to expire as scheduled, with Congress also feeling pressure to curb spending growth.

The effect apparently is already being felt. Senate Republicans on Monday blocked a bill that would aid victims of torture, disability and disease, insisting the legislation would add to the deficit and demanding that Congress first act to lower soaring gas prices.

Over time, bloated budget deficits — should they persist — could lead to higher interest rates on mortgages, car loans, student loans, business loans and other types of borrowing.

“The price that Uncle Sam pays to borrow money is the baseline for many consumer and business loans. If the price that Uncle Sam pays increases, then the price for the rest of us to borrow increases,” said Greg McBride, senior financial analyst at Bankrate.com.

For now, economists believe such a scenario would be more likely to play out gradually over time.

“It’s most likely to move at a glacial pace. You wake up and say, ‘Wow the needle has moved under our noses,’ ” McBride said.

If investors — especially foreign investors who have big holdings in U.S. securities — were to get spooked and suddenly sell their U.S. investments, however, interest rates could shoot up quickly. Analysts give slim odds to such a worst-case scenario.

The budget office predicts the economy will grow at a rate of 1.6 percent this year and will rebound to a 2.2 percent growth rate next year. That’s a half point higher than predicted by the widely cited “blue chip” consensus of business economists. The administration also sees inflation averaging 3.8 percent this year, but easing to 2.3 percent next year — better than the 3 percent seen by the blue chip panel.

“The nation’s economy has continued to expand and remains fundamentally resilient,” said the budget office report.

The deficit numbers for 2008 and 2009 represent about 3 percent of the size of the economy, which is the measure seen as most relevant by economists. By that measure, the 2008 and 2009 deficits would be smaller than the deficits of the 1980s and early 1990s that led Congress and earlier administrations to cobble together politically painful ­deficit-reduction packages.

On a slightly brighter note, the deficit for the 2008 budget year ending Sept. 30 will actually drop from an earlier projection of $410 billion to $389 billion, the report said.