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Obama takes off with 1,2 trillion budget deficit, 8.3% of GDP

Wednesday, January 7th 2009 - 20:00 UTC
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The sharp slowdown in the US economy will push the federal budget deficit to more than one trillion US dollars, the non-partisan Congressional Budget Office (CBO) announced Wednesday. The 1.186 trillion USD deficit for the fiscal year ending on 30 September would be the largest on record.

The projected deficit does not include the extra 800 billion spending being planned by US President-elect Barack Obama. But it highlights the deep economic difficulties facing Mr Obama when he is inaugurated on 20 January. The CBO says that the slowing economy will lead to the US budget deficit more than doubling from last year's figure of 455 billion. And even if the economy may recover by 2010, the deficit will still be more than 700 billion, and it projects an accumulated deficit of nearly 2 trillion over the next five years. As a percentage of total economic output, the deficit will be 8.3% of GDP. The previous record was 6% of GDP, set in 1983. The major reason for the deficit is the sharp decline in tax revenues, projected to fall by 6.6%, as well as the increase in spending due to the cost of the recession and the bail-out. The size of the budget deficit makes the shape of Mr Obama's stimulus package more of an issue. Mr Obama has described the US economy as "very sick" and has said that the situation is worsening. And he warned: "Potentially we've got trillion-dollar deficits for years to come, even with the economic recovery that we are working on at this point." He has been urging Congressional leaders to back his stimulus package, which is expected to cost between 700 and 800 billion over two years and create up to three million jobs. The plan would include about 300 billion in tax cuts, as well as additional spending on infrastructure and aid to the states. But he has said that he is determined to present plans to bring the long-term budget outlook into balance, and has appointed Nancy Killefer to the new post of governmental performance officer, charged with improving efficiency in government. He said that in order to rebuild trust in government, it was necessary to "put government on the side of taxpayers and everyday Americans". However, Mr Obama is also committed to major reforms of health care, education and the environment, all of which could increase spending. The US central bank, the Federal Reserve, has already cut interest rates to nearly zero in a bid to stimulate the economy. But even former Republican economists, such as Martin Feldstein, who advised Ronald Reagan, now say that a fiscal stimulus is needed because of the dysfunctional credit markets. "The heavy lifting will have to be done by increased government spending," he said in a paper to the American Economic Association. In addition, the budget deficit does not include some 350 billion USD in bail-out funds for the financial sector which have not been spent so far - half of the 700 billion package approved in October. In the longer run, the government also faces sharply higher costs for social security retirement payments and health care, as the Baby Boomer generation retires over the next decade.

Categories: Economy, United States.

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