Annual Budget Gap Passed Benchmark in June, Dimming Outlook for Economic Recovery and Appetite for Big-Ticket Policies

By JOHN D. MCKINNON

WASHINGTON — The U.S. federal budget deficit broke through the $1 trillion mark in June, potentially complicating the Obama administration’s efforts to revive the economy and enact its longer-term policy agenda.

The U.S. Treasury Department on Monday said the government’s annual deficit reached almost $1.1 trillion by the end of June, a once-unthinkable level that could threaten any nascent economic recovery by undermining the dollar and driving up interest rates.

Surging deficits could also tie the administration’s hands in responding to the economy’s problems, by eroding support among voters and making Congress leery of adopting policies — such as an overhaul of the health-care system — that the administration believes are necessary for sustainable growth.

It could be hard to win congressional approval for another round of fiscal stimulus, if that was seen as necessary, even as the economy continues to lag and the unemployment rate continues to rise, hitting 9.5% in June.

Some budget experts questioned whether lawmakers had the political will to take steps — such as tax increases and spending cuts — to help get the deficit under control.

“Most anybody who’s being honest knows we’ve reached a point where we’ve got a very dangerous fiscal situation, and it won’t fix itself,” said Maya MacGuineas, president of the nonpartisan Committee for a Responsible Federal Budget. She said the White House and Congress should negotiate a broad plan to reduce deficits now.

President Barack Obama on Monday stressed the importance of enacting health-care legislation as a way to bring down long-term deficits. A spokesman for the White House Office of Management and Budget, Kenneth Baer, termed health-care reform “the key to our fiscal future.”

But some budget watchdogs worry that Congress eventually could pass health-care legislation that relies on uncertain long-term savings, while substantially increasing short-term government expenditures.

The Obama administration in May estimated that the annual deficit would hit about $1.84 trillion by the end of the fiscal year, an increase from February’s projection of $1.75 trillion. The administration also slightly revised upward its deficit estimates for 2010 and 2011, to $1.26 trillion and $929 billion, respectively.

Slumping tax receipts, particularly from corporations and individual investors, have contributed substantially to the widening gap, as has rising spending on social safety-net programs, economic-stimulus measures and aid to auto and financial companies.

By historical standards, the 2009 deficit — at 13% or more of the country’s gross domestic product — would be the U.S.’s biggest since the end of World War II in 1945, when it reached 21.5%.

Some economists said the growing deficit hasn’t had much impact on interest rates so far, despite a brief spike a few weeks ago. In part, that is because private-sector borrowing remains weak. Meanwhile, demand continues to be strong for the Treasury debt used to finance the government’s deficit spending.

“The private-sector retrenchment is allowing the Treasury to raise a lot of funds at very low interest rates,” said Jan Hatzius, chief U.S. economist for Goldman Sachs & Co. “There’s a lot of demand” for federal debt.

Some economists also say the 2009 deficit doesn’t appear to be deepening as rapidly as once feared. Still, high deficit projections, along with rising unemployment rates, appear to be starting to hurt Mr. Obama politically. Some lawmakers from both parties are expressing concern about the potential tab for a health-care overhaul, which could cost the government up to $1 trillion over the next decade if spending isn’t offset by tax increases and savings.

“This trillion-dollar deficit makes clear that our nation’s fiscal situation is dire, yet Washington Democrats keep borrowing and spending money we don’t have and forcing our children and grandchildren to foot the bill,” House Minority Leader John Boehner said in a statement Monday.

Some Democrats are also worried about the deficit, particularly the so-called Blue Dog moderates in the House. Rep. Charlie Melancon of Louisiana, the coalition’s co-chairman, called for new budget restraints to be imposed on Congress.

“Our budget deficits didn’t appear overnight and won’t magically go away tomorrow,” he said in a statement. “The Blue Dogs are working with the President and leadership in Congress to reinstate” pay-as-you-go rules that would require Congress to come up with budget cuts to offset many new programs.

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