The Congressional Budget Office released figures Tuesday that indicate the red ink will spill over into next year, when the deficit would reach a record $438 billion -- and could go even higher as the government takes over mortgage giants Fannie Mae and Freddie Mac.
The worsening deficit is largely attributable to continuing weakness in the economy, high energy and food prices, and the slump in the housing and financial markets, the office said. The economy could still slide into a recession, according to the forecast.
"The economy is likely to experience at least several more months of very slow growth," the new report said. "Whether this period will ultimately be designated a recession or not is still uncertain, but the increase in the unemployment rate and the pace of economic growth are similar to conditions during previous periods of mild recession."
The Congressional Budget Office predicts that the economy will grow 1.5 percent this year in real terms and slip to just 1.1 percent growth in 2009.
The nonpartisan agency, which makes economic and budget estimates for Congress, also sees unemployment averaging 6.2 percent next year.
The office figures for this fiscal year, which ends Sept. 30, are slightly worse than the White House predictions released in July. The White House foresees a $389 billion deficit for 2008, growing to $482 billion in 2009.
If Congress fixes the Alternative Minimum Tax, next year's deficit could rise an additional $60 billion.
Democratic efforts to pass a second economic stimulus bill to follow the tax rebate checks sent out earlier this year would add $50 billion or so to next year's deficit. The White House and congressional Republicans are resisting the move and instead want Congress to pass other pieces of legislation, such as free trade agreements with Panama, Colombia and South Korea, to help the economy.
"We're not talking about a stimulus package," White House Press Secretary Dana Perino told reporters.
The new $400 billion-plus deficit numbers represent about 3 percent of the economy, which is the deficit measure seen as most relevant by economists.
In dollar terms, the record is the $413 billion deficit recorded in 2004.
NO DEFICIT RELIEF
Under the promises of Democratic presidential nominee Barack Obama and Republican nominee John McCain -- who both say they want to extend most of the tax cuts passed in 2001 and 2003 at the urging of President Bush -- the deficit is likely to remain high.
Even if all the Bush tax cuts were allowed to expire at the end of 2010, the budget would still run a considerable deficit of $325 billion in the following year, the Congressional Budget Office says.
The cost of extending the Bush tax cuts and other expiring pieces of the tax code, along with making sure the Alternative Minimum Tax doesn't trap more middle-class families, would reach more than $400 billion a year by 2012, the budget office says.
-- Associated Press