Monday, October 19, 2009

Record US deficit stokes concern

By Martin Crutsinger Washington

What is $1.42 trillion (R10.4 trillion)? It is more than the US's total national debt for its first 200 years and more than $4 700 for every American man, woman and child.

It is also the 2009 US federal budget deficit, three times more than any other deficit before. Some economists warn that unless the government start to cut spending or raise taxes, it could sow the seeds of another economic crisis.

Treasury figures released on Friday showed that the government spent $46.6 billion more than it received in September, a month that normally records a surplus. That boosted the shortfall for the full fiscal year that ended last month to $1.42 trillion. The previous year's deficit was $459 billion.

As a percentage of US economic output, it's the biggest deficit since World War II.

Forecasts of more red ink mean the federal government is heading toward spending 15 percent of its money by 2019 just to pay interest on the debt, up from 5 percent this year.

President Barack Obama has pledged to reduce the deficit once the great recession ends and the unemployment rate starts falling, but economists worry that the government lacks the will to make the hard political choices to get control of the imbalances.

Friday's report showed that the government paid $190bn in interest over the last 12 months on Treasury securities sold to finance the federal debt. Experts say this tab could quadruple in a decade as the size of the government's total debt rises to $17.1 trillion by 2019.

Without significant budget cuts, that would crowd out government spending in such areas as transport, law enforcement and education.

Already, interest on the debt is the third-largest category of government spending, after the government's entitlement programmes and the military.

As the biggest borrower in the world, the government has been the prime beneficiary of record low interest rates. The new budget report showed that interest payments fell by $62bn this year even as the debt was soaring.

The Congressional Budget Office projects that the debt held by investors both in the US and abroad will increase by $9.1 trillion over the next decade, pushing the total to $17.1 trillion under Obama's spending plans.

The $1.42 trillion deficit for 2009 - which was less than the $1.75 trillion projection that Obama made February - includes the cost of the government's financial sector bailout and the economic stimulus programme. Income taxes also dwindled as a result of the recession. Coupled with the impact of the tax cuts under former president George W Bush earlier in the decade, tax revenues fell 16.6 percent.

"We should be desperately worried about deficits of this size," says Mark Zandi, the chief economist at Moody's "The economic pain will be felt much sooner than people think, in the form of much higher interest rates and much higher rates of inflation." This could result in stagflation - a mix of inflation and economic stagnation.

The administration has pledged to include a deficit-reduction plan in its 2011 budget, which will go to Congress in February.

No comments:

National Debt Clock