How Will the Bailout Effect the Budget?October 7, 2008 - by Donny Shaw
Still, nobody knows for sure. But seasoned budget expert Stan Collender makes an educated guess today in his “Fiscal Fitness” column:
>Because of TARP [the Troubled Assert Relief Plan, aka the bailout], my estimate is that the budget deficit could easily reach or exceed $1 trillion this year. This includes my estimate of a $600 billion
deficit before TARP and an additional $400 billion afterwards. A deficit of
that size would be between and 6 percent and 7 percent of gross domestic
product, a level that hasn’t been reached since fiscal 1942-1946 when the
United States was fighting and paying for the direct costs of World War II.
>But the bigger cost of TARP may well be less in dollar terms than in making progress in other areas. A $1 trillion, 7-percent-of-GDP deficit likely will chill most of the spending and taxing plans of whoever is elected as hoped-for tax cuts and spending increases have to be delayed. There could even be a big push for deficit reductions if the market reacts very negatively to the 1-year, 10 percent increase in the national debt and interest rates are pushed higher by the bond market vigilantes that were so evident at the start of the Clinton administration.
(h/t OMB Watch)