By Ron Scherer
October 16, 208
NEW YORK - The US government's extraordinary effort to rescue
the banking system may have pulled America's economy back from
the brink, but it comes at a cost helping to push an already
bloated deficit up to an estimated $1 trillion for this fiscal
year.
That would be a record in today's dollars and would represent
the highest level of federal red ink as a share of the overall
economy of any US budget since the 1940s. For each household,
this year's deficit would pile on an extra $8,620 of federal
debt.
As a result, future presidents may have to rein in spending
and raise taxes to pay down that debt. If they don't, foreign
lenders at some point could scale back their purchases of US
debt, sending interest rates soaring.
"There are times when you need to run up the deficit
and this is one of them," says Maya MacGuineas, president
of the Committee for a Responsible Federal Budget, a nonpartisan
group in Washington that came up with the $1 trillion estimate. "But
we ran them up when we did not need to, and we have no plan
to stop running them up. We have become serial deficit spenders."
It could be worse. The rising estimates of the deficit are
based in part on the calculation that tax revenues will shrink
as the economy contracts and unemployment rises. If the recession
is less severe because of the bank rescue, then the deficit
will be smaller. If Congress enacts a new economic stimulus
package, the deficit could go up.
Another unknown is the actual costs of the $700 billion financial
rescue bill. In the first year of the three-year program, the
US Treasury might spend $400 billion, estimates Stanley Collender,
managing director at Qorvis in Washington and a budget expert.
But the Congressional Budget Office is not likely to count
it as a direct expense since it might be considered a loan
or an investment.
"As long as you treat it as a loan or capital transaction,
then you have to look at the difference between the initial
expenditure and the amount you would expect to get back," says
Barry Bosworth, a senior fellow at the Brookings Institution,
a Washington think tank. "Maybe it will be scored at a
cost of $100 billion or higher. Otherwise, the budget deficit
would be way over $1 trillion."
If the deficit does reach $1 trillion this year, it would
represent 7.5 percent of the gross domestic product, the highest
percentage since World War II when it skyrocketed to 30 percent
of GDP. "The big difference is back then we owed it to
ourselves, to Americans," says David Walker, head of the
Peter G. Peterson Foundation and former US comptroller general.
Mr. Walker is part of an effort called the Fiscal Wake-Up
Tour, which is traveling around the nation meeting with editorial
boards and holding town-hall gatherings to explain the budget
situation. Next year, the group, sponsored by the Concord Coalition,
will focus on solutions.
Walker's focus is not just the national debt, which will grow
to more than $10 trillion this year. Instead, he is looking
at the national debt plus all the unfunded promises such as
Social Security and Medicare, which have no future tax revenues
to cover them. "At the end of the last fiscal year, that
came to $53 trillion or about $550,000 per household," he
says. "We may well have passed the point where the federal
government's total financial hole exceeds the net worth of
all Americans."
Walker estimates the US has about five years to show fiscal
responsibility: "We will have to send a strong signal
we can get our house in order."
That's not going to happen this fiscal year. Congress is expected
to pile on new spending, such as an $80 billion reduction in
taxes for individuals who would otherwise fall under the Alternative
Minimum Tax (AMT) and $8 billion in hurricane Ike relief funds.
So far, Congress has only appropriated $70 billion for the
Iraq and Afghanistan effort, despite the fact that the wars
have been costing about $150 billion per year. And revenues
are likely to be considerably lower than anticipated.
"We have fewer people working, lower corporate profits,
and losses in the markets," says Mr. Collender, who says
one of the implications of the huge deficit will be that any
of the plans by the presidential candidates for tax cuts or
new spending programs will be put on hold.
"It also makes a tax increase in the future much more
likely," he says. "No one is talking about raising
taxes now. But by the end of 2009 or beginning of 2010, that
could be a consideration, especially if there is a threat of
higher interest rates."
Higher interest rates could be in the mix if some of the world's
lenders were to start to diversify their assets.
"We don't look like such a great bet anymore," says
Ms. MacGuineas, who worries that the next "bubble" will
be government debt.
However, not everyone sees the picture in such bleak terms.
In an analysis on Wednesday, Drew Matus, US economist for Merrill
Lynch & Co., projects interest rates on 10-year US Treasury
bonds falling below 3 percent in large part because inflation
will fall more rapidly than expected. And he anticipates supply
and demand for the securities – estimated to total $3.2
trillion over five years – will be about equal. "We
put our emphasis on the fundamentals over the medium term and
continue to be bullish on Treasuries," he writes.
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