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Federal Katrina Costs Balloon

Cost estimates for relief and recovery efforts from Hurricane Katrina (search) are running as high as $150 billion, making it clear that a federal budget deficit picture that only weeks ago seemed to be brightening has now gotten considerably worse.

In July, with great fanfare, the White House (search) announced a $94 billion improvement in the deficit outlook for the current budget year and promised that President Bush would easily fulfill his pledge to cut last's year's record deficit in half by the time he leaves office.

The White House budget office in July was predicting that the deficit for the budget year ending Sept. 30 would drop to $333 billion, $79 billion below last year's record, and that next year's deficit would be $341 billion. Now, both figures are rising fast as the government spends about $2 billion a day on the Katrina relief effort, all of which adds directly to the deficit.

At this point, the government is spending whatever it takes. Even the most severe spending hawks say there is no other course.

"Yes, it will cost an extraordinary amount of money ... and yes, it will obviously increase the deficit significantly in the short term," said Senate Budget Committee Chairman Judd Gregg (search), R-N.H.

The White House is sticking by its prediction that the deficit can still be cut in half from the $521 billion deficit once projected for last year to $260 billion by 2009. That presumes the costs of Katrina are largely absorbed in the next couple of years and don't weigh on the deficit over the long term.

"Right now we see ourselves on a continuing declining path in the deficit out over the next several years toward the 2009 goal that the President talked about," said Office of Management and Budget Director Joshua B. Bolten. "This kind of spending adds a challenge to us in meeting those goals, but I don't think it's a long-term challenge. I think the kind of spending we're talking about here is something that will be a concern in the next year or two, and not long run for the economy."

Some lawmakers say at least some offsetting spending cuts should be found to ease the impact of the Katrina catastrophe on the nation's books. But they are lonely voices.

"Everybody in America is going to have to sacrifice to help us rebuild the Gulf Coast," said Sen. Tom Coburn (search), R-Okla., a stout fiscal conservative. "Every government program, every individual, we are all going to have to sacrifice."

Bolten, however, says it is impractical to expect such sacrifices.

"While I applaud the sentiment, I think it's not likely to be practically realistic to plan to try to offset in other places of the budget the large emergency relief that's needed in this case," said Bolten.

Instead, as with the war in Iraq or the assistance to New York City that was passed in the aftermath of the Sept. 11, 2001, terrorist assaults, the massive relief, recovery and rebuilding effort that will follow Katrina will be added straight onto the deficit instead of being financed by cuts elsewhere in the budget.

In fact, a modest effort planned for this month to cut $35 billion over the next five years from federal entitlement programs is now in doubt as lawmakers reconsider cutting programs, such as the Medicaid health care safety net for the poor, in the wake of Katrina. If anything, Medicaid spending is likely to go up.

The other half of the deficit equation is revenues. While a Senate vote to repeal the estate tax has been put off indefinitely, and planned moves to extend cuts made in 2003 to taxes on dividends and capital gains now seem less likely, lawmakers say they are now looking at tax cuts aimed at helping hurricane victims and helping the economy weather Katrina's jolt.

"We need to look at the tax code to see what might be done to help investment, to help people in need," said Senate Finance Committee Chairman Charles Grassley (search), R-Iowa.