Watchman Newsletter

Federal deficit on track for a record this fiscal year

The Washington Times (Link) - Stephen Dinan (February 14, 2011)

President Obama�s budget, released Monday, was conceived as a blueprint for future spending, but it also paints the bleakest picture yet of the current fiscal year, which is on track for a record federal deficit and will see the government�s overall debt surpass the size of the total U.S. economy.

Mr. Obama�s budget projects that 2011 will see the biggest one-year debt jump in history, or nearly $2 trillion, to reach $15.476 trillion by Sept. 30, the end of the fiscal year. That would be 102.6 percent of GDP � the first time since World War II that dubious figure has been reached.

And the budget projects the government will run a deficit of $1.645 trillion this year, topping 2009�s previous record by more than $230 billion. By contrast, 2007�s deficit was just $160 billion altogether.

Still, amid the other staggering numbers in the budget Mr. Obama sent to Congress on Monday, the debt stands out because Congress will need to vote to raise the debt limit later this year, and because the numbers are so large.


In one often-cited study, economists Carmen Reinhart and Ken Rogoff have argued that when a nation�s gross debt passes 90 percent it hinders overall economic growth. The government measures debt several ways. Debt held by the public includes the money borrowed from Social Security�s trust fund.

Actual debt held by the public will reach 72 percent of GDP in 2011 and will climb as the Social Security trust fund�s finances continue to deteriorate.

Republicans argued Monday that the Obama administration�s new budget fails to appreciate the depth of the country�s fiscal plight.

�I still don�t see a sense of urgency from the president about the massive federal debt,� said Sen. Lamar Alexander, Tennessee Republican. �His budget calls for too much government borrowing � even though the debt is already at a level that makes it harder to create private-sector jobs.�

White House budget Director Jacob �Jack� Lew said the goal was to get to a point where the debt is at least stabilized by the middle of the decade.

�The government will no longer be adding to our debts, and as a share of the economy, we�re going to stabilize the deficit,� he told reporters. �We�ll, in short, be paying for what we spend every year. The goal, to put it simply, is for the deficit to be in the range of 3 percent of our economy by the middle of the decade.�

And indeed that�s what the numbers show. Nominal debt will peak in 2013 at 106 percent of the economy before dropping to 105.2 percent in 2015 and 2016, though only if the economy booms.

While the Obama administration assumes a fast economic rebound after two years of sluggish growth, the nonpartisan Congressional Budget Office last month offered a more pessimistic view, saying that this recovery will be slow for years to come.

But the recovery could have other, less-beneficial effects, including higher interest rates. The government currently is benefiting from rates that are a fraction of their historic level, which means substantially lower borrowing costs for corporations and individuals.

Lawmakers said those low interest rates can�t last. Sen Tom Coburn, Oklahoma Republican, said for every point that interest rates increase, the government would be paying an extra $140 billion a year on its debt right now. �


America ~ Economic Crisis ~ Obama