Whoever the new President of the United States is, they will have an early and unwelcome chance to deal with perhaps the biggest headache of their time in office, the monster known as the US budget deficit, which could first trillion dollar budget deficit in US history.
The American treasury said overnight that it will borrow an incredible $US550 billion this quarter to finance Government spending, plus fund the rescue programs being put in place to deal with fallout of the financial crisis.
“This borrowing estimate is $408 billion higher than announced in July 2008. The increase in borrowing is primarily due to higher outlays related to economic assistance programs, lower receipts, and lower net issuances of State and Local Government Series securities,” the Treasury said in its statement.
The Treasury said that on top of that, it would borrow $US368 billion in the first quarter of 2009. During the July — September 2008 quarter, Treasury borrowed $US530 billion of marketable debt. This was in the last quarter of the 2008 financial year.
So by the end of March next year, the US Treasury will have borrowed nearly $US1.4 trillion. That more than double what some US economists were predicting earlier this year, before the credit crisis intensified in September-October.
To put it in a form we can understand here: those borrowings over nine months more than exceed the size of the Australian economy in the year to June 30, 2008.
US economists now say that figure of $US1.4 trillion will be around what the Government needs to borrow in the year to September 30, 2009. But the stress it could rise as the economy falls deeper into recession and government revenues disappear.
Some US economists say there is now a very good reason to believe the Federal budget deficit for the year to next September will be around $US1 trillion, compared with the Bush Administration’s forecast of $US480 billion in July. The actual deficit for the 2008 year was $US455 billion, so the outcome will be more than double that, if the economy slows further and more jobs are lost.
Tackling that will be a real task for Presidents Obama or McCain. It will limit the grandiose plans and mean the president will not be able to do very much at all until the economy starts recovering, sometime in 2010.
Spending more on health care, and cutting taxes won’t be on the agenda, not with a deficit of around $US1 trillion and such a huge financing program.
Markets will want it cut to limit the upward pressure on interest rates that will come as the economy starts recovering and businesses and individuals start borrowing again.