WASHINGTON – The federal deficit has topped $1 trillion for the first time ever and could grow to nearly $2 trillion by this fall, intensifying fears about higher interest rates, inflation and the strength of the dollar.
The soaring deficit is making Chinese and other foreign buyers of U.S. debt nervous, which could make them reluctant lenders down the road. It could also force the Treasury Department to pay higher interest rates to make U.S. debt attractive longer-term.
The Treasury Department said Monday that the deficit in June totaled $94.3 billion, pushing the total since the budget year started in October to $1.09 trillion. The administration forecasts that the deficit for the entire year will hit $1.84 trillion in October.
Congress already approved a $700 billion financial bailout for banks, automakers and other sectors, and a $787 billion economic stimulus package to try to jump-start a recovery. Outlays through the first nine months of this budget year total $2.67 trillion, up 20.5 percent from a year ago.
President Barack Obama and Treasury Secretary Timothy Geithner have said the U.S. is committed to bringing down the deficits once the economy and financial sector recover. The Obama administration has set a goal of cutting the deficit in half by the end of his first term in office.
In the meantime, the U.S. debt now stands at $11.5 trillion. Interest payments on the debt cost $452 billion last year – the largest federal spending category after Medicare-Medicaid, Social Security and defense.
The overall debt is now slightly more than 80 percent of the annual output of the entire U.S. economy, as measured by the gross domestic product. During World War II, it briefly rose to 120 percent of GDP.
Many private economists say the administration had no choice but to take aggressive action.
“We have a deep recession hammering tax revenues and forcing the government to provide a lot of help to the economy,” said Mark Zandi, chief economist at Moody’s Economy.com. “But without this help, the downturn would be even more severe.”
Republicans in Congress are seizing on the deficit to attack Democrats.
“Washington Democrats keep borrowing and spending money we don’t have,” said House Republican Leader John Boehner of Ohio.
The deficit of $1.09 trillion so far this year compares to an imbalance of $285.85 billion through the same period a year ago. The deficit for the 2008 budget year, which ended Sept. 30, was $454.8 billion, the current record in dollar terms.
Revenues so far this year total $1.59 trillion, down 17.9 percent from a year ago, reflecting higher unemployment, which cuts into payroll taxes and corporate tax receipts.