The debt is largely financed by the sale of US treasury bonds and bills and the deficit is making Chinese and other foreign buyers of those instruments nervous about their security.
It could also force the US treasury department to pay higher interest rates to make US debt attractive in the long-run.
“These are mind-boggling numbers,” Sung Won Sohn, an economist at the Smith School of Business at California State University, told the Associated Press.
“Our foreign investors from China and elsewhere are starting to have concerns about not only the value of the dollar but how safe their investments will be in the long run.”
Spending up, collections down
Government spending – including a $700bn financial bailout and a $787bn stimulus package – has dramatically increased in order to address the worst financial crisis in the US since the Great Depression and an unemployment rate that has climbed to 9.5 per cent.
|The government has spent hundreds of billions to tackle the economic slump [EPA]|
Outlays for the first nine months of the budget year totalled $2.67 trillion, up 20.5 per cent from the same period a year ago while revenue of $1.59 trillion so far this year is down 17.9 per cent from a year ago, reflecting higher unemployment, which cuts into payroll taxes and corporate tax receipts.
Republicans in congress have seized on the deficit and the persistence of the recession to attack Democrats, with some like John Boehner, the House Republican leader, complaining that “Washington Democrats keep borrowing and spending money we don’t have”.
But some private economists say the Obama administration had no choice but to take aggressive action in the face of the financial crisis.
Mark Zandi, the chief economist at Moody’s Economy.com, said the recession was “hammering tax revenues and forcing the government to provide a lot of help to the economy”.
“But without this help, the downturn would be even more severe,” he said.
There is even growing talk among some government officials that a second round of stimulus may eventually be necessary.
Soaring interest payments
The deficit of $1.09 trillion so far this year compares to an imbalance of $285.85bn for the same period a year ago.
The deficit for the 2008 budget year, which ended last September 30, was $454.8bn, the current record in dollar terms.
The overall US debt now stands at $11.5 trillion and interest payments on the debt alone cost $452bn last year – the largest federal spending category after healthcare, social security and defence.
Barack Obama, the president, and his treasury secretary, Timothy Geithner, have said the US is committed to bringing down the deficit once the economy and financial sector recover, setting a goal of halving the deficit by the end of Obama’s first term in office.
Under his administration’s budget estimates, the $1.84 trillion deficit for this year will be followed by a $1.26 trillion deficit in 2010, and will not dip below $500 bn over the next decade.