The Fiscal Climb Gets Steeper

If you use a ballpark estimate for $225 billion in new stimulus, with one-third spent in fiscal 2010 and two-thirds in 2011, total stimulus in the current budget year will amount to about $430 billion.

Now consider that President Obama's budgeted path to $9 trillion-plus in deficits through 2019 would build in a roughly $500 billion fiscal swing over the next two years "” from $430 billion in net stimulus in 2010 to $65 billion in net deficit reduction in fiscal 2012.

This chart shows the fiscal climb ahead. In addition to the rough estimate for the new stimulus package, it reflects all expiring stimulus provisions (including the Worker, Homeownership, and Business Assistance Act of 2009); expiration of income and investment tax cuts for upper earners; a slew of other taxes proposed by the White House targeting a variety of industries and loopholes; and the upfront net tax hikes and saving curbs in the still-evolving Senate health care bill.

How will the economy fare if stimulus unwinds and Washington begins to tap the fiscal brakes? The uncertainty in the face of potentially still-high unemployment makes it a good bet that Washington will want to stretch out the fiscal climb, meaning even bigger-than-projected deficits in the near future.

The next big question is whether Congress will let the $400 Making Work Pay tax credit expire. The White House budget calls for it to be extended, but paid for with new cap-and-trade revenues that may not materialize.

Already, despite the advertised $200 billion in lower TARP losses, budget deficits may be on a higher trajectory than the White House projected in August. CBO had forecast $9.1 trillion deficits under Obama's budget plan in the spring "” before it downgraded its economic forecast. Then there is the recently announced surge for Afghanistan. The House has apparently ignored suggested White House budget curbs in putting together a massive year-end appropriations bill.

And while the Senate health bill could save a little, if things go according to script, much of the savings would be tied to upfront premiums paid into a long-term-care program that would eventually run deficits.