Record U.S. deficit of $1.4 trillion could have been worse

The United States has just logged its biggest budget deficit year in history.The nation posted a $46.6 billion deficit for September, and a record $1.42 trillion deficit for the 2009 fiscal year, which ended September 30, the U.S. Treasury announced Friday. But there is actually some good news, of sorts, in the swelling national debt figures.

The positive note? The $1.42 trillion deficit is $162 billion less than the $1.58 trillion deficit projected by the U.S. Treasury in its August Mid-Session Review.But while the news could have been worse, the numbers are still pretty grim. Economists surveyed by Bloomberg News had expected the U.S. to post a $31 billion deficit in September. And the $1.42 trillion 2009 deficit is nearly three times the $454.8 billion deficit for 2008, due mainly to the bank bailout and $786 billion fiscal stimulus package.

Declining tax revenues have also had a major impact on the budget picture. Overall, in 2009, tax receipts were $419 billion lower than in 2008. That reflects the impact the U.S.'s pronounced recession that has reduced payrolls, shrinking individual income tax receipts.

In 2009, receipts fell 16.6 percent to $2.105 trillion, while outlays increased 18.2 percent to $3.522 trillion. Interest on the national debt ballooned in 2009 to $383.4 billion. To put the interest cost in perspective, the 2009 interest total is more than half the U.S. Department of Defense's 2009 $637 billion budget.

The Obama administration forecasts a $1.412 trillion deficit for fiscal 2010, which began October 1.

The U.S. government last ran a surplus during fiscal year 2001, posting a surplus of $128 billion in the last budget year of the Clinton administration.

Pressure building
The political pressure to do something to reduce the deficit has increased in recent months, mainly as various financial markets signal trouble ahead. For more than a year, the currency market was relatively unmoved by the large U.S. budget deficit since the spending was needed to bail out the banking system and jump-start the economy.

However, in the last four months, the currency markets have reflected unease, with the dollar weakening about 10 percent versus both the euro and yen.

A weaker dollar does benefit U.S. exporters, but a continued decline in the dollar may cause international investors to balk at investing in the United States, on concern a depreciated dollar would cut into any gains earned from dollar-denominated investments.

The bond market has (so far) shown few signs of holding up a halt sign. That market is funding the huge borrowing needs of the U.S. government. Luckily, demand exists for U.S. debt, lowering U.S. interest costs to service the national debt.

Obama's record? Interpretations of the Obama administration's progress regarding the budget deficit differ. The Heritage Foundation, a conservative think tank based in Washington, D.C., argues the Obama administration's 10-year budget, excluding health care reform, will result in deficit spending of $13 trillion -- not the $9 trillion the administration has forecast. Heritage says this is due to the administration's "unrealistic estimates of discretionary spending, interest payments, and interest rates."

Conversely, The Brookings Institute, a left-of-center think tank based in Washington, D.C., said placing the blame on President Obama and the Democrats is not accurate. "Both parties have had terribly disappointing records in establishing fiscal discipline," says Brookings.

The non-partisan, independent Congressional Budget Office, in its most recent forecast, expects this year's deficit to be $1.381 trillion, roughly in-line with the Obama administration's estimate. CBO also forecasts $921 billion and $590 billion budget deficits in fiscal 2011 and 2012, respectively.

Budget Balancing:
What's a good way to get a handle on the deficit? It's really not so hard. After the economic recovery takes hold, in addition to letting the 2001 Bush tax cuts expire, Congress should pass a 5-to-10 percent surcharge on incomes over $500,000 (with sliding-scale exclusions for small businesses). Then it needs to pass a 5-to-10 percent across-the-board spending reduction, excluding Social Security and health care spending (the latter of which should trend lower once health care reform legislation is passed).

Those spending cuts and tax increases should reduce the deficit to about $150-to $200 billion by fiscal 2016, assuming normal, historical U.S. GDP growth. If above-trend growth occurs during the years 2010 to 2016, and if the government takes the above actions, the Federal budget could be balanced by the end of 2016.

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