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US deficit forecast to be four times last year's record

Stimulus spending is one reason. Tax revenues also drop during a recession.

By Staff writer / August 12, 2009

Newscom

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To put some context on a new estimate that puts this year's federal deficit at $1.8 trillion, consider this: That amount had never been spent by the federal government in a single year until 2000, let alone borrowed.

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That's right. As the decade began, the US government spent $1.8 trillion in a year for the first time. Now it's poised to spend that much in excess of its tax revenues.

The Treasury released the latest figures Wednesday, showing spending of about $3 trillion in the past 10 months, and revenues of only $1.74 trillion.

With two months to go in the fiscal calendar, the Obama administration is projecting that the imbalance will end up totaling $1.84 trillion, more than four times last year's record-high. The monthly deficit for July, also reported this week, came in a bit above what economists had expected.

The record red ink stems from familiar sources. The government is spending prodigiously on stimulus, to lift the economy out of recession, and on rescuing the financial system from a credit crisis. The cost of wars in Iraq and Afghanistan add to the tab.

Meanwhile, in recessions tax revenues tend to fall, and this one is no exception. Government receipts were down about 6 percent in July from a year before.

The good news is that many of these forces are cyclical or temporary. The massive stimulus won't last forever, and revenues from taxes should rise again when the economy grows healthier.

"We expect this year’s deficit will be ... 10.5 percent of GDP [gross domestic product] and next year’s to equal 8.3 percent of GDP as the spending spree and revenue weakness persist into the first year of the recovery," Merrill Lynch economist Drew Matus wrote in a report last week. The report predicted shrinking deficits after that, but warned that the "the long-term outlook remains poor."

That's the bad news, many economists agree. The fiscal position will remain difficult, since baby boomers are already starting to retire in a wave that will grow more costly in coming years.

The soaring deficits have raised worries among foreign owners of US Treasury securities including the Chinese, the largest holder of such debt. President Barack Obama's economic team sought to reassure the Chinese during high-level talks last month that the administration is committed to reducing the deficits once the current economic and financial crises have been resolved.

The concern, however, is that rates could begin rising if foreigners lose confidence in the government's ability to manage its debt burden.

In bond markets, prices fell Wednesday after a fairly weak auction of $23 billion in 10-year Treasury notes. The Treasury Department is auctioning a record $75 billion in debt this week.

The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.75 percent from 3.70 percent ahead of the auction results and 3.67 percent late Tuesday.

The total public debt now stands at $11.6 trillion. Interest payments on the debt cost $452 billion last year, the largest federal spending category after Medicare-Medicaid, Social Security, and national defense.

Material from the Associated Press was used in this report

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