CBO just posted its latest budget update. The headline number is a $1.2 trillion deficit in fiscal year 2009. That’s indeed alarming—especially considering that it excludes the $750 billion or so in additional stimulus that president-elect Obama promises.

But beyond the next couple of years, things don’t look that bad. The economy recovers, the Bush tax cuts expire, and by 2018, the budget deficit weighs in at a svelte $188 billion.  Admittedly, this is still a big reversal from previous forecasts, which held out the promise of surpluses (not to mention the actual, real surplus on the books when President Bush took office). But a sub-$200 billion deficit doesn’t look too scary compared with the current situation.

The only problem with this sort of good news is that the projection is based on the wildly implausible assumption that nothing changes. The Bush tax cuts expire as scheduled at the end of 2010. The AMT consumes the middle class. The dozens of perpetually extended expiring provisions, like the hugely popular research and experimentation tax credit, are allowed to disappear. And the trillions in tax cuts and new spending that president-elect Obama promised just  fade into memory.

CBO is not cooking the books. It’s required to assume current law actually plays out as written. But it also provides a very useful supplemental table (Table 7) that shows alternative scenarios. Suppose the Bush tax cuts, the AMT patch, and all the other expiring provisions are extended. Under these assumptions, the rosy scenario turns into a harbinger of doom.  By 2019, we’re running trillion dollar deficits again, despite a healthy economy, and the deficits are growing fast.

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President-elect Obama understands this parlous arithmetic and has said all the right things about wanting to avoid this dismal fiscal future. However, his campaign insisted that “current policy” (something like the red line in the figure) was the more relevant policy benchmark, and its claims of fiscal responsibility measure up only in comparison to that reckless yardstick.

Let’s hope that while his economic SWAT team attends to the current crisis, it’s also plotting a plausible strategy to avoid the long-term fiscal calamity. A good place to start would be to forget most of his campaign promises.