Ahead of the Bell: Federal Budget

AP News
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Posted: Nov 12, 2009 6:30 AM

The federal deficit is expected to hit $150 billion for the first month in the new budget year, headed toward another $1 trillion-plus tide of red ink. Economists worry such deficits could push up interest rates, adding a further drag on the fragile economic recovery.

Economists surveyed by Thomson Reuters expect the October deficit totaled $150 billion. That would compare with a September deficit of $46.6 billion and an imbalance of $155.5 billion in the same month last year. The year-ago total was pushed higher by $33 billion in spending for the Troubled Asset Relief Program, the rescue effort for the banking system that launched in October 2008.

The Treasury Department is scheduled to release the new figure at 2 p.m. EST Thursday.

The deficit for the 2009 budget year, which ended on Sept. 30, set an all-time record in dollar terms of $1.42 trillion. That was $958 billion above the 2008 deficit, which had been the previous record holder.

In relation to the overall economy, the 2009 deficit was 9.9 percent of the gross domestic product. That was the highest level since the World War II-era deficit hit 21.5 percent of GDP in 1945.

The devastating effects of the country's worst recession since the 1930s and the government's efforts to stabilize the financial system with a $700 billion bank bailout fund and a $787 billion economic stimulus program drove the 2009 deficit.

The Obama administration projects the deficit for 2010 will hit $1.5 trillion and will remain above $1 trillion in 2011. In fact, according to the estimates it made in August, the deficit will never drop below $739 billion over the next decade.

So far, the government has been able to borrow to finance the soaring deficits at low rates because the recession pushed interest rates down and the Federal Reserve has worked to keep them low in an effort to stimulate a rebound.

But the concern is that government borrowing at such levels will start to push interest rates higher as the economy begins to recover, making it more expensive for businesses and consumers to borrow the money they need. Another worry is that foreigners could become spooked by the size of all the deficits and cut back on their purchases of Treasury debt.

China, the largest foreign holder of U.S. Treasury securities, has expressed concerns about the size of the U.S. deficits, prompting administration officials to issue repeated pledges that it will start to tackle the deficits as soon as the recovery is on more sustained footing.

Treasury Secretary Timothy Geithner, on a visit to Tokyo on Wednesday, told reporters that "as growth recovers and strengthens, we're going to bring our fiscal positions back to a sustainable balance."

Republicans have attacked the administration for failing to put forward what they consider a credible plan to deal with the soaring deficits. That debate is expected to intensify in coming weeks as Congress is faced with the need to raise the government's debt limit, currently at $12.1 trillion. The administration said last week that it expects to hit the current limit in December.