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Stimulus with interest: $1.2 trillion

As Obama lobbies critics on Hill to pass recovery plan, budget agency estimates long-term cost.

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By Jeanne Sahadi, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) -- The long-term cost of the $825 billion economic recovery package before Congress could rise to $1.2 trillion over 10 years, a top budget official said Tuesday.

That's because the government will borrow to fund the plan and pay an estimated $347 billion in interest, Congressional Budget Office Director Douglas Elmendorf told the House Budget Committee on Tuesday.

The calculation was made at the request of House Republicans who have questioned the size and effectiveness of the bill.

When asked at a press briefing about the interest cost affecting the overall cost of stimulus package, White House press secretary Robert Gibbs on Tuesday said, "The real price tag is how much the plan costs now, $825 billion." He likened it to being asked how much a house costs. Typically the price given is the sales price, not the 30-year cost with interest, he said.

Elmendorf, in response to a question from Paul Ryan, R-Wis., the committee's ranking member, said that this year's annual deficit could rise to 10% of gross domestic product once the cost of the recovery package is combined with the costs of other spending bills Congress will consider in the next month.

While Elmendorf described the increase in debt as "stunning," he said the depth of economic downturn is also stunning. The CBO estimates that the House fiscal stimulus package could increase GDP by between 1.3 percentage points and 3.6 percentage points this year and by a similar range next year.

President Obama on Tuesday turned up the heat on his push for the legislation when he met with Republicans critical of his plan.

A major Republican criticism of the bill: many of its provisions would not jolt the economy back to life quickly enough.

The CBO late Monday evening released its first analysis of the total stimulus package as proposed by House Democrats. The CBO estimates that roughly 64% of the $825 billion package would be put to use in 2009 and 2010, assuming a stimulus bill is signed into law in mid-February.

By contrast, Peter Orszag, Obama's budget director, vowed to congressional leaders last week that 75% of the money would be spent within 18 months.

The CBO's 64% estimate includes the money that would be spent on commitments in the bill plus the revenue loss the CBO estimates will occur as a result of the tax relief provisions in the bill.

When the spending provisions are counted alone, Elmendorf said, 52% of the money would be spent over the next six quarters. Fifteen percent would occur this year and 37% in 2010.

The question of just how fast states and other agencies can spend money to do things like fix roads and retrofit buildings to make them more energy efficient will remain central to the congressional debate in coming days.

The legislation is on a fast-track. Key committees on Tuesday debated the Senate version of the bill. And the full House is expected to vote Wednesday. Democratic leaders have said they aim to get it to Obama for enactment by President's Day.

'Noticeable impact on economic growth'

Overall, CBO said in its report Monday that the bill's provisions "would have a noticeable impact on economic growth and employment in the next few years."

The agency also estimates that by the fourth quarter of 2010, the bill would create between 1.2 million and 3.6 million jobs.

But not all measures would be equally effective in the short run.

Provisions that involve direct payments to individuals such as increased unemployment benefits and food stamps, as well as tax relief for individuals and businesses, would take effect most quickly.

But government spending on infrastructure projects -- either directly or through grants to state and local governments -- would take place much more slowly.

For example, CBO said that provisions to increase energy efficiency and renewable energy use would ultimately be spent within seven years. The agency estimates that it would take five years to spend 85% of the money dedicated to highway and other infrastructure projects.

The bill increases infrastructure spending far above current levels. Critics of the bill charge that too much of that spending couldn't be put to use quickly.

The CBO said it contacted transportation officials in nearly half the states. Further, the report noted, congressional authorizations for sharp increases in spending have typically been followed by "a noticeable lag" in actual spending.

"CBO expects that federal agencies, along with states and other recipients of that funding, would find it difficult to properly manage and oversee a rapid expansion of existing programs so as to expend the added funds as quickly as they expend the resources provided for their ongoing programs," the agency wrote.

But in his testimony before the House Budget Committee on Tuesday, Elmendorf said "spend-out at different rates may be appropriate." He noted that the expected gap between "potential output" -- what the economy would produce if conditions were good -- and actual output will exist for the next few years even after the recession ends.

The CBO estimates that gap is $1 trillion this year and another $1 trillion next year.

"The shortfall relative to the potential output is going to be quite large," Elmendorf said.  To top of page

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