US runs a 4th straight $1 trillion-plus budget gap

MARTIN CRUTSINGER

PAUL WISEMAN

AP Eco­nom­ics Writers

WASHINGTON — The United States has now spent $1 tril­lion more than it’s taken in for four straight years.

The Trea­sury Depart­ment con­firmed Fri­day what was widely expected: The deficit for the just-ended 2012 bud­get year — the gap between the government’s tax rev­enue and its spend­ing — totaled $1.1 tril­lion. Put sim­ply, that’s how much the gov­ern­ment had to borrow.

It wasn’t quite as ugly as last year.

Tax rev­enue rose 6.4 per­cent from 2011 to $2.45 tril­lion. And spend­ing fell 1.7 per­cent to $3.5 tril­lion. As a result, the deficit shrank 16 per­cent, or $207 billion.

A stronger econ­omy meant more peo­ple had jobs and income that gen­er­ated tax rev­enue. Cor­po­ra­tions also con­tributed more to fed­eral rev­enue than in 2011.

The gov­ern­ment spent less on Med­ic­aid and on defense as U.S. mil­i­tary involve­ment in Iraq was wind­ing down.

Barack Obama’s pres­i­dency has coin­cided with four straight $1 trillion-plus annual bud­get deficits — the first in his­tory and an issue in an elec­tion cam­paign that ends in 3½ weeks.

When Obama took office in Jan­u­ary 2009, the Con­gres­sional Bud­get Office fore­cast that the deficit that year would total $1.2 tril­lion. It ended up at a record $1.41 trillion.

The increase was due in large part to the worst reces­sion since the Great Depres­sion. Tax rev­enue plum­meted, and the gov­ern­ment spent more on stim­u­lus programs.

Tax cuts enacted under Pres­i­dent George W. Bush and mil­i­tary spend­ing in Iraq and Afghanistan con­tributed to the deficits.

“There is noth­ing like the num­ber tril­lion to focus the mind,” says Maya MacGuineas, pres­i­dent of the Com­mit­tee for a Respon­si­ble Fed­eral Bud­get, which advo­cates bud­get dis­ci­pline. “The fis­cal sit­u­a­tion is ter­ri­ble. Changes will have to be made as quickly and care­fully as possible.”

Here’s a closer look at the nation’s deficit and its debt, which rep­re­sents the accu­mu­la­tion of annual deficits:

— ROOTS OF THE PROBLEM

The 2012 bud­get gap sig­nals a slight recov­ery from the deficit explo­sion that hit in late 2008. That’s when the finan­cial cri­sis erupted and the reces­sion that began in Decem­ber 2007 was tight­en­ing its grip.

The sink­ing U.S. econ­omy caused tax rev­enue to plum­met. And fed­eral spend­ing surged. The money went to pro­vide laid-off work­ers with unem­ploy­ment insur­ance and food stamps. The gov­ern­ment also spent more to pro­vide eco­nomic stim­u­lus pro­grams and to sta­bi­lize the finan­cial system.

Before it esca­lated, the deficit had been as low as $161 bil­lion in 2007. By 2009, it had peaked at $1.4 tril­lion. Since then, the improve­ment has been slight but steady. Tax rev­enue is still less than in 2007.

— THE OUTLOOK

The aging of the vast baby boom gen­er­a­tion is rais­ing gov­ern­ment spend­ing on Social Secu­rity and on Medicare and Medicaid.

A still-weak econ­omy, along with tax cuts, have mean­while reduced gov­ern­ment rev­enue. Over the past three years, rev­enue has fallen below 16 per­cent of gross domes­tic prod­uct — the value of all goods and ser­vices pro­duced in the United States. It’s the low­est such per­cent­age since 1950. That isn’t enough to sus­tain spend­ing, which has been exceed­ing 22 per­cent of GDP.

And so the gov­ern­ment has bor­rowed to make up the gap. And debt piles up, year after year. It’s reached $11.3 tril­lion — $16.2 tril­lion if you include money the gov­ern­ment has bor­rowed from itself, mostly rev­enue from Social Security.

Unless some­thing changes, the Con­gres­sional Bud­get Office warns, the fed­eral debt would reach a level that is “unsus­tain­able from both a bud­getary and an eco­nomic perspective.”

Still, Trea­sury is ben­e­fit­ing from record-low inter­est rates. Those rates make it cheaper to bor­row. Inter­est pay­ments on the debt fell 2 per­cent this year to $223 billion.

For the cur­rent 2013 bud­get, the admin­is­tra­tion pre­dicts a deficit of $991 bil­lion. Its slightly brighter out­look reflects lower spend­ing on defense, health care, unem­ploy­ment ben­e­fits and Med­ic­aid pay­ments to states — all of which declined this year.

Many pri­vate fore­cast­ers are less opti­mistic about the deficit. Ana­lysts at JPMor­gan fore­see a $1 tril­lion bud­get gap for 2013. That would mark a fifth straight year of deficits of at least $1 trillion.

All that assumes the coun­try avoids tax increases and deep spend­ing cuts that take effect next year unless Con­gress reaches a bud­get deal.

— THE THREAT

Over time, big gov­ern­ment debts can dam­age the econ­omy. The econ­o­mists Ken­neth Rogoff of Har­vard Uni­ver­sity and Car­men Rein­hart of the Peter­son Insti­tute for Inter­na­tional Eco­nom­ics have found that growth tends to slow sharply once national gov­ern­ment debt reaches 90 per­cent of GDP.

When the gov­ern­ment bor­rows heav­ily, it can drive up inter­est rates and divert financ­ing that would have been avail­able for pri­vate companies.

Ris­ing debt lev­els can cause some investors to lose con­fi­dence in the government’s abil­ity to pay its bills. They would demand sub­stan­tially higher inter­est rates.

Higher rates would dis­cour­age busi­nesses and con­sumers from bor­row­ing, thereby slow­ing the econ­omy. The gov­ern­ment would col­lect less in taxes and spend more on unem­ploy­ment ben­e­fits and other social programs.

That cre­ates a vicious cycle like the one that has entrapped Euro­pean coun­tries such as Spain, Italy and Greece; Rates are ris­ing, economies buck­ling, bud­get deficits widen­ing and debts swelling. So far, that hasn’t hap­pened to the United States.

Investors, wor­ried about the trou­bles in Europe, have been eager to buy Trea­sury debt, allow­ing the fed­eral gov­ern­ment to bor­row at his­tor­i­cally low rates.

— THE FIX:

If he’s elected to a sec­ond term, Obama has pledged to reduce the government’s deficits over the next 10 years by about $4 tril­lion. Obama says he would reduce the growth of fed­eral spend­ing — slowly, to avoid trig­ger­ing another reces­sion. He also wants to end the Bush-era tax cuts on income that exceeds $200,000 peo­ple for sin­gle tax­pay­ers and $250,000 for couples.

Repub­li­can chal­lenger Mitt Rom­ney says he would also reduce spend­ing growth by cap­ping it at 20 per­cent of the econ­omy by 2016. In 2012, spend­ing has accounted for about 23 per­cent of the economy.

Rom­ney would pre­serve the Bush-era income tax cuts for all tax­pay­ers, regard­less of how much they earn. The econ­omy is too weak to raise taxes on any­one, Rom­ney has argued.

He says his plan to cut income tax rates for every­one by an addi­tional 20 per­cent would help pro­duce more tax rev­enue. And he says he would reduce the deficit in part by curb­ing some tax loop­holes and deductions.

Com­pli­cat­ing the polit­i­cal options is a cri­sis that Con­gress must first resolve: A bud­get dead­lock could send the econ­omy over a “fis­cal cliff” next year, when tax increases and deep spend­ing cuts will take effect unless a bud­get deal is reached.

After the elec­tions, Con­gress may address the bud­get cri­sis dur­ing a lame-duck session.

Posted by AP News on Oct 12 2012. You can follow any responses to this entry through the RSS Feed. Comments can be made below.