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U.S. Deficit Dilemma: This Time Its Worse

Gap of $1.4 trillion will likely get bigger, even if economy revives

Conveying the enormity of the U.S. budget deficit is tough. As humor columnist Dave Barry once observed, millions, billions and trillions sound too much alike. Think golf balls, watermelons and hot-air balloons, and you get a better idea. If todays tax rates prevail, federal benefits are paid as promised and other spending grows at the same pace as the economy, the deficit will be bigger in 2019 than at any time in Barack Obamas lifetime and thats even if the economy revives.

For the fiscal year that ended Sept. 30, the final deficit tally will be about $1.4 trillion. Measured against the size of the economy, thats 9.9% of gross domestic product, bigger than any year since 1945. As a share of GDP, tax and other revenues are lower (15%) and spending higher (25%) than anytime in the past 50 years.

President Obama says this isnt his fault. Of the $9 trillion in deficits projected over the next decade, the White House blames $5 trillion on the past the Bush tax cuts, the wars in Iraq and Afghanistan and the Medicare prescription-drug bill that a Republican Congress passed and George W. Bush signed without any visible means of support.

The White House pins the other $4 trillion on the consequences of the recession and financial crisis. The real problem isnt how we got here, its where we are: Another day older, and deeper in debt.

The U.S. has confronted big deficits before. Numbers like this will eventually prompt corrective measures, just as a stark but less worrisome budget outlook did in 1990, Goldman Sachs economists assured clients last week. This time will be tougher. We are starting from a much deeper hole. When the economy began climbing out of the deep recession of the early 1980s, federal debt the sum of every annual budget deficit amounted to less than 30% of the U.S.s GDP, the value of all the goods and services produced in a year. At the beginning of the 1990s, it was less than 40%. Today, it exceeds 50% of GDP and is rising towards 80%, perhaps 100% of GDP over the next 10 years. Even at todays low interest rates, the federal government spent about $195 billion on interest in fiscal 2009, more than 10 times the entire NASA budget. A rising debt-to-GDP ratio means interest takes an evergreater slice of the budget, much of that going to the foreigners.

But the president has yet to offer a business plan to demonstrate how he will prevent the U.S. from becoming the worlds largest subprime borrower. We will be showing more about what we intend to do about the deficit when the presidents budget comes out in February, promised Peter Orszag, the presidents budget director.

Inside the administration, the policy wonks are divided. Those most pessimistic about the economy talk of more deficit-widening stimulus, arguing that reviving economic growth is the imperative. Deal with deficits later. Those who see an improving, if sluggish, economy say the deficit must be addressed before it causes a crisis of confidence among U.S. creditors and provokes a dollar crash or a sharp increase in bond-market interest rates.

The presidents political advisers are hardly deficit phobes by nature, but see rising public angst about the deficit and Republicans scoring points by talking about it. The latest Wall Street Journal/NBC News poll posed a choice: Should Washington worry about keeping the budget deficit down even though it may mean it will take longer for the economy to recover or should it worry more about boosting the economy even though it may mean larger budget deficits now and in the future? Some 62% chose deficit-fighting; only 30% picked economic revival.

The rub is that the deficit-fearing public doesnt want tax increases or spending cuts. Everyone dislikes the deficit, and everyone dislikes the specific steps you have to take to get out of it, Mr. Orszag says. Any realistic attack on deficits will both restrain spending on benefits and raise taxes on Americans earning less than $250,000 a year, despite the presidents vow not to do that.

The if-I-were-king answer is to give the economy a little more carefully crafted stimulus now and enact spending restrains and tax increases that take effect in three or four years when the economy is healthier. But even if Mr. Obama could talk Congress into that, the fiscal credibility of the U.S. political system is so weak that few would believe that the promised belt-tightening actually would take effect.


The Wall Street JournalOctober 2009



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