The U.S. federal budget deficit has topped $1 trillion for the first time ever and could grow to nearly $2 trillion by this fall, intensifying fears of higher interest rates, inflation and the strength of the dollar.
The deficit has been widened by the huge sum the government has spent to ease the recession, combined with a sharp decline in tax revenues. The cost of wars in Iraq and Afghanistan also is a major factor.
The soaring deficit is making Chinese and other foreign buyers of U.S. debt nervous, which could make them reluctant lenders down the road. It could also force the Treasury Department to pay higher interest rates to make U.S. debt attractive longer term.
“These are mind-boggling numbers,” said Sung Won Sohn, an economist at the Smith School of Business at California State University. “Our foreign investors from China and elsewhere are starting to have concerns about not only the value of the dollar but how safe their investments will be in the long run.”
The Treasury Department said on Monday the deficit in June totaled $94.3 billion, pushing the total since the budget year started in October to $1.09 trillion. The administration forecasts that the deficit for the entire year will hit $1.84 trillion in October.
Government spending is on the rise to address the worst financial crisis since the Great Depression and an unemployment rate that has climbed to 9.5 per cent.
Congress has already approved a $700- billion financial bailout for banks, automakers and other sectors, and a $787-billion economic stimulus package to try to jump-start a recovery. Outlays through the first nine months of this budget year total $2.67 trillion, up 20.5 per cent from the same period a year ago.
There is growing talk among some. Obama administration officials that a second round of stimulus may eventually be necessary.
That has many Republicans and deficit hawks worried that the U.S could be setting itself up for more financial pain down the road if interest rates and inflation surge. They also are raising alarms about additional spending the administration is proposing, including its plan to reform health care.
President Barack Obama and Treasury Secretary Timothy Geithner have said the U.S. is committed to bringing down the deficits once the economy and financial sector recover.
The Obama administration has set a goal of cutting the deficit in half by the end of this first term in office.
In the meantime, the U.S. debt now stands at $11.5 trillion. Interest payments on the debt cost $452 billion last year – the largest federal spending category after Medicare-Medicaid, Social Security and defence.
The overall debt is now slightly more than 80 percent of the annual output of the entire U.S. economy, as measured by the gross domestic product.
History shows the dangers of assuming too soon that economic downturns have ended.
President Franklin D. Roosevelt made that mistake in 1936. Believing the Depression largely over, he sought to reduce public spending and to balance the federal budget, but that undermined a fragile recovery, pushing the economy back under water in 1937.
Mr. Geithner travels later this week to Saudi Arabia and the United Arab Emirates, where he is expected to face question about the U.S. deficit. As he did during a visit to China last month, Mr.Geithner will try to reassure investors in West Asia that their U.S. holdings are safe from a calamitous bout of inflation.
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