Obama takes note of budget deficit but promises decisive action

WASHINGTON — President-elect Barack Obama took sober note Wednesday of a stunning projection by the Congressional Budget Office for a $1.2 trillion federal budget deficit this year, then warned that without decisive action, «trillion-dollar deficits will be a reality for years to come.»

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He said for the first time that changes in the vastly expensive social programs that target the poor and the elderly – programs like Social Security and Medicare consume nearly half of all federal spending – would be «a central part» of his administration’s budget plans. The size and pervasive reach of those programs almost guarantees contentious debate over any change.

Obama’s comments came as his once briskly run transition bogged down further in questions about people he is expected to name to some high-profile posts – the CNN health reporter Sanjay Gupta for surgeon general, and the former Clinton chief of staff Leon Panetta to head the CIA. They also came as uncertainty continued over Roland Burris, though the Illinois Democrat appeared to edge closer Wednesday to being given a Senate seat.

«Just today, the Congressional Budget Office announced that the deficit we are inheriting from this budget year will be $1.2 trillion,» Obama said at his transition offices in Washington. «My own economic and budget team projects that, 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.»

The projected $1.2 trillion deficit was far higher than most analysts had predicted, and it does not account for the costs of any economic stimulus measures that the president-elect hopes to enact.

If combined with the gigantic stimulus package of tax cuts and new spending that Obama is preparing along with congressional Democrats, the shortfall this year could hit $1.6 trillion. This would be the largest, in terms of percentage of the gross domestic product, since World War II.

«This is one of the worst budget forecasts I have seen in my lifetime,» said Senator Kent Conrad, Democrat of North Dakota and chairman of the Senate Budget Committee. But he said the forecast merely highlighted the urgency of enacting a major stimulus program to prevent the recession from getting even worse.

Obama said he was more determined than ever to pass a sweeping stimulus package by next month.

The president-elect has used explicit language this week to describe the economic situation as he seeks to reassure lawmakers and the financial markets that he is aware of the long-term dangers of running huge deficits and will eventually to reduce them.

Republicans and some fiscally conservative Democrats have expressed concern that the need for a substantial stimulus plan could sweep away for years any serious effort to bring government spending into line with revenues.

The president-elect offered no specifics Wednesday on how he would address the entitlement programs. But they are vital to millions of Americans, and any talk of cutting benefits has long been considered politically explosive. On the other hand, both programs face long-range problems, as the legions of baby-boomers and the costs of medical care continue to grow.

Obama faces a confluence of bad economic news and problems. Tax revenues are declining, unemployment is steadily climbing and public confidence has soured.

Still, Obama said, «if we do nothing then we will continue to see red ink as far as the eye can see.»

He thus pledged again to eliminate wasteful spending and announced, as expected, the appointment of Nancy Killefer, a former Treasury Department official, to the post of the country’s first chief performance officer. Her mission, he said, was to help identify budget cuts that will be badly needed if the new administration is to stand much chance of pivoting with any sort of speed from its massive spending increase to a dramatic tightening of spending to rein in deficits.

The budget office predicted that the economy would contract by 2.2 percent in 2009 and register only anemic growth in 2010. It said that the unemployment rate, which was 6.7 percent in November, would exceed 9 percent by the end of this year. The agency estimated that tax revenues will sink by $166 billion, or 6.6 percent.

But one reason that the agency’s deficit estimate exceeded those of outside analysts was that it added in hundreds of billions of dollars in spending tied to the government’s existing bailout programs, which the Bush administration has thus fare treated as «investments» it would recoup.

As Obama continued to work on his stimulus plan – he indicated Wednesday that it might approach $800 billion, but not the $1 trillion some economists say might be needed – political complications continued to plague his transition.

Word that Gupta, 39, a neurosurgeon, was the leading contender to become the next surgeon general, brought tough criticism and questions about Gupta’s financial relationships to pharmaceutical companies.

Gupta has served on the advisory board or as a consultant for Eli Lilly and Forest Laboratories; received research or grant support from at least six drug makers; and held stock or stock options in other companies, according to a financial disclosure form he filed in 2007 for a professional body.

Common among doctors, such financial relationships are coming under increasing scrutiny.

While Gupta’s work on CNN and also CBS has made him among the best-known doctors in the country, there were complaints about his relative lack of experience in public health.

The surgeon general oversees the 6,000-member Commissioned Corps of the U.S. Public Health Service. And a representative of the Commissioned Corps, Gerald Farrell, bluntly questioned Gupta’s experience.

«This would be akin to appointing the army chief of staff from the city council of Hoboken,» New Jersey, he told The Washington Post.

The man Obama has nominated as attorney general, Eric Holder, also came in for criticism. Senator Arlen Specter of Pennsylvania, the ranking Republican on the Judiciary Committee, said Holder’s experience in the Clinton White House showed that he was too willing to do the president’s bidding.

«He’s had an outstanding academic and professional record,» Specter said Tuesday on the Senate floor. But «sometimes it is more important for the attorney general to have the stature and the courage to say no instead of to say yes.»

Among the issues Specter cited was Holder’s failure to oppose President Bill Clinton’s pardon of the fugitive financier Marc Rich after Rich’s ex-wife had made donations to the Clinton presidential library.

But Senate Democratic leaders appeared to open the door Wednesday to allowing Burris to replace Obama in the Senate. That would leave the president-elect with one distraction less in a dizzying week of developments.

Following a meeting with Burris, Senator Harry Reid of Nevada, the majority leader, said that he was open to recognizing Burris’s appointment as long as he met a series of conditions.

They said that Burris, whose appointment was challenged because of the federal inquiry surrounding Governor Rod Blagojevich, had to secure the signature of the Illinois secretary of state and persuade a state legislative committee that there was nothing untoward about the appointment.

(Gardiner Harris and Eric Lichtblau contributed reporting.)