Federal Deficit Could Top $1 Trillion

Published January 1, 2009

Since the end of May 2008 the federal government has added $1.2 trillion to its public debt to buy up, bail out, or take over major banks, the world’s largest insurance company, automakers, and other entities.

Many analysts project the federal budget deficit to hit $1 trillion this fiscal year and the national debt to approach $11 trillion. A $1 trillion deficit would represent about 7 percent of the nation’s gross domestic product, a record

Each Household’s Tab: $20K

“Beginning in the middle of the year, the federal government’s existing annual deficit has been increased by bank bailouts, insurance company rescues, and by coming to the aid of automobile manufacturers and their unions,” said Sheila Weinberg, founder and CEO of the Institute for Truth in Accounting, a nonpartisan public interest group in Northbrook, Illinois.

“For the 60 million households that pay taxes, these government programs add more than $20,000 in future liabilities,” Weinberg added

$58 Trillion Debt

Weinberg calculates the nation’s true debt—including pension and health insurance liabilities owed to federal employees and veterans, and Social Security and Medicare obligations—has reached $58 trillion, more than $175,000 for each American.

“The government is currently borrowing hundreds of billions of dollars to bail out the troubled banking and housing industries,” Weinberg said. “My question is, who is going to bail out the federal government and every citizen when we can’t borrow any more money?”

AIG’s Ongoing Bailout

On November 10 the federal government announced a restructuring of the $152 billion bailout of American International Group (AIG), the world’s largest insurance organization, to ease the financial terms for the company. That came barely a month after the government bought an 80 percent stake in the company in exchange for an $85 billion loan, which soon became a $123 billion pledge, which saw another $20 billion pledged on top of that.

That news followed by just two days an announcement by General Motors Corporation that it could run out of money by the end of December, leading to speculation of a further government rescue of the auto industry, on top of a recent government pledge of $25 billion in loans to the auto companies.

Record Deficit

These and other recent government actions in the financial crisis are sending the federal budget deficit to unprecedented levels.

“My guess is that in 2009 we will break the record of 6 percent of GDP,” said Rudolph Penner, a senior fellow at the Urban Institute and director of the Congressional Budget Office during the Reagan administration, when budget deficits averaged 4.2 percent of GDP and peaked at 6 percent.

“But there is a huge difference between now and when Reagan was president,” Penner said. “The difference is that the long-run budget problem is now short-run, with Baby Boomers retiring. The CBO projects that over the next eight years Social Security, Medicare, and Medicaid will take up 1.6 percent more of GDP [than they do now]. It’s going to be hard to get rid of the debt because these three big entitlements are growing faster than tax revenues.”

Continual Crises

Cato Institute budget policy analyst Tad DeHaven agrees with that assessment.

“Every couple of years now we have a crisis—a terrorist attack, a natural disaster, financial difficulties—and the solution from government every single time is to spend more money. These crises give politicians an excuse to not look at offsets and to ignore long-term repercussions,” said DeHaven.

“We have a ticking time bomb of Baby Boomers who will be retiring en masse in the next decade,” DeHaven continued. “Medicare and Social Security will be taking in less money than they need to pay out.”

The result could be sharply higher taxes and price inflation as the government prints money to cover its debts, DeHaven said.

The federal budget deficit soared from $162 billion in the 2006-2007 budget year to $455 billion in the fiscal year that ended last September, largely because of the cost of a $168 billion economic stimulus package earlier in the year, slower tax revenues resulting from the weakening economy, and continuing expenses in the Iraq and Afghanistan wars.

Calls for More

Meanwhile, some lawmakers are calling for a new economic stimulus package.

In October, Goldman Sachs, one of the financial firms now partly owned by the federal government, issued a report calling for a $500 billion stimulus. Federal lawmakers in recent weeks have suggested stimulus packages ranging from $150 billion to $500 billion.

This all worries Penner.

“Congress is bound to put lots of fluff in the stimulus, and it won’t do much stimulating,” Penner said. “We’d probably get a small and temporary increase in unemployment in exchange for interest on debt we will owe forever.”

Bailout Busyness

In addition to the AIG rescue and money for U.S. automakers, the government has instituted partial government takeovers of the nation’s largest banks. The latter was meant to pour cash into the banks so they would lend more money, but the banks have sat on the money to strengthen their balance sheets or used it to buy weaker competitors, give bonuses to executives, and pay dividends to shareholders.

Some members of Congress, including Sen. John McCain (R-AZ), have proposed using some of the $700 billion to provide direct mortgage relief to homeowners.

These actions followed other government financial rescue efforts earlier in the year, including a $29 billion bailout of investment bank Bear Stearns and pledges of $200 billion to the quasi-governmental mortgage companies Fannie Mae and Freddie Mac, whose involvement in the collapsed subprime real estate loan market triggered the financial crisis.

Steve Stanek ([email protected]) is a research fellow at The Heartland Institute and managing editor of Budget & Tax News.