Obama Administration Announces Deficit Tally

Sources: NYTimes.com: Deficit Hits $1.4 Trillion, Complicating Stimulus Plans; CNNMoney.com: U.S. Deficit Biggest Since 1945; WSJ.com: Deficit of $1.4 Trillion Limits Democrats.

The numbers are in, and it’s a new record. Fiscal year 2009 came to an end September 30, and the Obama Administration announced Friday that the deficit has reached a staggering $1.42 trillion. Further, the Administration warns that the next decade could see deficits totaling $9.1 trillion if corrective action is not taken.

Economists suggest that the U.S. deficit should not exceed three percent of the nation’s gross domestic product (GDP). GDP is a basic measurement of economic performance that calculates the final market value of a country’s goods and services. The 2009 deficit exceeds 10 percent of the nations GDP, making this deficit the highest since 1945 at the end of World War II. The deficit has risen nearly 7 percent since 2008, when it was at 3.2 percent of GDP.

Reasons for Increase
In 2009, the government reportedly collected 16.6 percent less in revenue than it did in 2008. As the recession deepened, job loss increased, causing the government to lose relied upon income tax. Loss in revenue combined with government tax cuts aimed at stimulating spending resulted in a dramatic drop in revenue. At the same time, government spending rose substantially due to the economic and financial bailouts. The $700 billion Troubled Asset Relief Program (TARP) (the financial bailout package) and the $787 billion American Recovery and Reinvestment Act (the economic stimulus package) accounted for 24 percent of the total deficit. Joint statements made by Timothy Geithner, Treasury Secretary, and Peter Orszag, the director of the Office of Management and Budget (OMB), placed the blame on spending and tax decisions of the Bush Administration combined with the debilitating recession and the financial crisis.

Consequences of the Increase
Estimated future deficits in light of the Obama Administration’s future budget proposals are considered unsustainable to some experts, given that the expected inadequacies concerning Social Security and Medicare funding were already looming before the financial crisis took hold. Investors who finance the debt (such as China), have expressed concerns as to whether the country will recover its losses and regain fiscal control; however, as unemployment and foreclosure problems persist, the government is forced to keep the focus on stimulating the economy, which adds to the deficit rather than reducing it.

The Bright Side
The actual deficit calculation released by the Obama Administration was lower than the Treasury and the OMB had anticipated, due to estimates in early August put out by Congress of $1.6 million and by the White House budget office of a projected $1.8 million. It is possible the overages were due to several financial institutions repaying their bailout money with interest.
After the deficit figure was announced Friday, the Obama Administration released a statement standing by economic recovery measures taken and promising to enact a plan that will lessen the deficit when the economy recovers.

Discussion Questions:
1) As is common when unfavorable economic news is published, both political parties are playing the “blame game.” The democrats claim the Bush Administration is the source of all current economic woes, while the GOP claims over-spending by the democratically-ruled congress and current White House are to blame. Does this problem have a primary cause, and if so, does that cause originate with one political party?

2) Current numbers show that the country is close to breaching the debt ceiling (the highest amount of debt the country allows itself to take on). What consequences could come from raising the amount we allow ourselves to borrow? Is raising the amount the only option?