U.S. budget deficit in 2008 soars to a record $454.8 billion

WASHINGTON - The federal budget deficit soared to $454.8 billion in 2008 as a housing collapse and efforts to combat the economic slowdown pushed the tide of government red ink to the highest level in history.

The Bush administration said yesterday that the deficit for the budget year that ended Sept. 30 was more than double the $161.5 billion recorded in 2007.

It surpassed the previous record of $413 billion, set in 2004. Economists predicted a far worse number next year as the costs of the government's rescue of the financial system and the economic hard times hit the balance sheet.

Some analysts say they believe next year's deficit could easily top $700 billion, giving the next president a formidable challenge.

The administration attributed this year's record deficit to a litany of economic problems. The prolonged housing slump sharply reduced economic growth and has sent the unemployment rate rising, developments that reduce tax revenue.

"This year's budget results reflect the ongoing housing correction and the manifestation of that in strained capital markets and slower growth," Treasury Secretary Henry M. Paulson Jr. said in a statement accompanying the deficit report. "While it will take time to work through this period, we will overcome the current challenges facing our nation."

The credit crisis that has swamped the financial system is boosting outlays because of the costs of protecting the depositors of failed banks.

Those costs will increase significantly in coming years. The government faces the prospect of paying for the $700 billion rescue plan, which will use $250 billion in coming months to buy stock from banks to bolster their balance sheets and also buy up bad assets now on banks' books.

Those efforts are aimed at relieving strains on banks so they can resume more normal lending and ease a credit crisis that is threatening to push the country into a severe recession.

Many private economists say they believe the country will not be able to escape a recession even if the rescue program is successful at getting banks to resume lending.

The Bush administration is projecting that the deficit in the budget year ending in 2009 will rise to $482 billion; that estimate, made during the summer, does not include the costs of the rescue program passed by Congress on Oct. 3.

The deficit for 2008 reflected the costs incurred in recent months for a $168 billion economic-stimulus program that Congress passed at the beginning of this year in an effort to combat the economic slowdown. Those checks did give the economy a boost in the late spring and early summer. That impact has now faded, leading many analysts to project that the current quarter and the first three months of next year will show declines in gross domestic product.