Continued: A river of red ink

WASHINGTON - The White House predicted Monday that President Bush would leave a record $482 billion deficit to his successor, a sobering turnabout in the nation's fiscal condition from 2001, when Bush took office after three consecutive years of budget surpluses.

The new figure is driven by war costs, tax rebates and a slowing economy that will leave the next president little room to fulfill costly campaign promises. And the worst may be yet to come.

"We are not happy about the deficit," conceded Jim Nussle, the White House budget director.

The deficit does not reflect the full cost of military operations in Iraq and Afghanistan, the potential cost of another economic stimulus package, or the possibility of steeper losses in tax revenues if individual income or corporate profits decline. It also does not account for any drains on the national treasury that might result from further declines in the housing market.

The forecast was prepared before passage of the huge housing assistance package that Bush has promised to sign. That legislation would put taxpayer money at risk in numerous ways, especially if housing prices continue to decline.

'It will be a sobering moment'

After three successive years of decline, this year's explosion of red ink is likely to scramble the plans of the next president, regardless of whether Republican John McCain or Democrat Barack Obama prevails. Each candidate has pledged hundreds of billions of dollars in new tax cuts or in new spending. And the winner in November will inherit a government deeply in debt.

"This is going to make it extraordinarily difficult for whoever's going to become president," said Senate Budget Committee Chairman Kent Conrad, D-N.D. "I don't care who the president is -- when they come in and meet with their secretary of the Treasury, the Federal Reserve chairman, their top economists, it will be a sobering moment."

Nussle predicted that the deficit would more than double in the current 2008 fiscal year -- to $389 billion, from $162 billion in 2007 -- before shooting up to $482 billion in the 2009 fiscal year, which begins in October.

The deficit projected for 2009 would be the largest in absolute terms, easily surpassing the record of $413 billion in 2004. The White House and many economists prefer to measure the deficit as a share of the economy. The projected 2009 deficit would be 3.3 percent of the economy. That is the largest share since 2004, but well below the percentages recorded in the 1980s and early 1990s. In 1983, the deficit was 6 percent of the overall economy.

'That's not the real number'

The White House is assuming economic growth next year of 2.2 percent, down sharply from the 3 percent estimate of February but still brighter than the 1.7 percent growth estimate of many private-sector economists. The White House is also assuming rosier numbers for inflation and unemployment rates.

"That's not the real number," former Bush Treasury Secretary Paul O'Neill said of the $482 billion deficit forecast. "It's upward of $500 billion and counting. It's a mind-boggling number."

Neither McCain nor Obama has been particularly mindful of the budget deficit. McCain has proposed extending all of Bush's first-term tax cuts, which expire in 2011, and adding hundreds of billions more, mostly for business. The nonpartisan Tax Policy Center, run jointly by the Urban Institute and the Brookings Institution, estimates the cost of McCain's tax policies at $3.6 trillion over the next decade.

Obama's proposals -- to extend Bush's tax cuts for taxpayers earning less than $250,000 and to cut other taxes for the working poor and middle class -- would cost $2.7 trillion over 10 years, the Tax Policy Center said. Obama would spend an additional $130 billion a year on health care, renewable energy, education and other programs.

Obama adviser Jason Furman said all those costs would be offset by savings from ending the war in Iraq, by repealing some of Bush's tax cuts and by slicing subsidies for high-income farmers, private insurers in Medicare and banks in the student loan program, among other cuts. He said the new deficit figures would not affect Obama's campaign promises.

Said McCain: "There is no more striking reminder of the need to reverse the profligate spending that has characterized this administration's fiscal policy."

However, his adviser, Harvard University economist Martin Feldstein, said the surge of red ink is tied to cyclical developments -- the economic stimulus checks and the slowing economy -- not permanent changes. "So I don't think it has implications going forward," he said.

Analysts were skeptical. The new numbers "are going to constrain what either of them can do, both in terms of spending and in terms of tax cuts," said Leonard Burman, director of the Tax Policy Center and a former Treasury official.

The Washington Post and New York Times contributed to this report.