The small problem of the biggest deficit ever

Business Times - 20 Oct 2009

The small problem of the biggest deficit ever

America's huge deficit is likely to remain since any efforts to curb it may be unpalatable


OBAMA administration officials are trying to spin the terrible economic news - that the United States registered its largest annual budget deficit in history - by urging everyone to look on the bright side. Yes, the US posted a US$46.6 billion deficit for September and a historic record US$1.42 trillion deficit for the 2009 fiscal year (ended Sept 30).

But, hey, there was some good news. The budget deficit was actually lower than expected.

Indeed, the size of the deficit this year wasn't as bad as government economists had originally thought it would be. In August, federal budget analysts calculated that the government would end the year US$1.58 trillion in the red. And in May, they had predicted a deficit of US$1.84 trillion.

'This year's budget deficit is lower than we had projected earlier this year, in part because we are managing to repair the financial system at a lower cost to taxpayers,' explained US Treasury Secretary Timothy Geithner and Office of Management and Budget (OMB) director Peter Orszag in a joint statement on Friday.

Moreover, the two top economic officials of the Obama administration seemed to be playing offence as they attempted to blame the budget shortfall on the policies of the Bush administration. 'The FY2009 deficit was largely the product of the spending and tax policies inherited from the previous administration, exacerbated by a severe recession and financial crisis that were underway as the current administration took office,' their statement said.

And in a preemptive strike against their Republican critics who were bound to charge that the Obama administration's spending to finance its US$786 billion fiscal stimulus package was responsible for the deficit, Messrs Geithner and Orszag argued that their economic rescue efforts accounted for only 24 per cent of the overall deficit.

Finally, the heads of the Treasury and the OMB insisted that notwithstanding the 'good news' and their somewhat less than significant responsibility for the huge deficit, President Barack Obama was 'committed to working with Congress to bring them down to a sustainable level as the economy recovers'.

But notwithstanding the clever spin by the Obama administration, it was clear that the record US$1.42 trillion 2009 deficit - three times the US$454.8 billion deficit for 2008 - was going to place major economic and political constraints on the ability of Mr Obama to implement his ambitious domestic agenda, including the proposed plan to overhaul the US healthcare system.

And as Mr Obama considers various US military options in managing the war in Afghanistan, the reality of the massive federal government deficit could force the administration to reject proposals to send 40,000 to 60,000 troops to that country.

While the government-backed efforts to bail out America's financial institutions that had begun under the Bush administration coupled with the fiscal stimulus explain the depressing budget situation, the fall in tax receipts in 2009, which were US$419 billion lower than last year, have also contributed to the current shortfall. Adding to the financial burden has been the cost of paying interest on the national debt which has swollen to US$383.4 billion in 2009.

The Obama administration has projected a US$1.5 trillion budget deficit for fiscal year 2010 and a US$1.1 trillion deficit for 2011, with budget shortfalls returning to more manageable levels - measured in billions as opposed to trillions of dollars - starting in 2012.

The non-partisan, independent Congressional Budget Office (COB) expects this year's deficit to be US$1.381 trillion along the lines of the Obama administration's forecasts and agrees that the budget deficits in 2012 would fall below US$1 trillion.

The Obama administration and the Democrats on Capitol Hill certainly have a case when they blame much of the current and projected deficits on the huge spending by the Bush administration on domestic programmes and the wars in Iraq and Afghanistan while refusing to increase government revenue by raising taxes; in fact, the previous administration succeeded in pressing the Republican Congress to approve large tax cuts.

'We are going to run fiscal policy in this country consistent with that basic objective of going back to living within our means,' said Mr Geithner during an address in Washington this month, stressing that his commitment to ensure that any spending on the part of the administration would have covered by government revenues, following the so-called 'pay-as-you-go principle'.

Hence, Mr Obama has pledged to overhaul the US healthcare system without adding to the deficit and even save some money in the next 10 years.

But even the most optimistic forecasts being discussed in Washington don't point to any dramatic drop in the federal government deficits anytime soon. The reality of continuing large deficits has been igniting concerns in Wall Street and Washington as well as among many Americans, including the majority of independent voters who helped elect Mr Obama as president in 2008, and who could end up voting for the Republicans in the 2010 mid-term Congressional elections, leading to the loss of Democratic control of the House of Representatives and the Senate.

Bush policies may have been responsible for the current deficit, but most voters in the next few years are going to perceive it as 'Obama's deficit'.

And then, there are the investors. The recent anxiety in the currency markets over the large US deficits, reflected in the weakening in the value of the US dollar against both the yen and the euro, demonstrated the dilemmas facing economic officials.

The decline in the value of the US dollar does help American exporters. But it also makes it more likely that the Chinese, and other foreign holders of US government debt, might baulk at investing in the US and even reduce their current holdings.

In any case, economists agree that any serious effort to control the mounting deficits would have to include a tax increase of more than 10 per cent on wealthy Americans coupled with a 10 per cent across-the-board spending reduction. And as Mr Obama is well aware, very few presidents have won elections by cutting spending on voters' favourite spending programmes and by raising taxes.

Copyright © 2007 Singapore Press Holdings Ltd. All rights reserved.


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