The federal deficit and You

Jerome Idaszak, associate editor of the Kiplinger Letter, authored an interesting report on the cost of the growing federal budget deficit.

He makes the point clear in his first sentence: “The massive economic rescue plan carries with it an onerous price: a ballooning federal deficit that will equal 12.2% of the gross domestic product (GDP) this year, a post-World War II high.”

Idaszak notes that a lot of economic factors will have to “go just right” for President Barack Obama to cut his 2010 budget deficit of $1.3 trillion in half by 2013.

Repaying the debt, retaining flexibility to answer baby-boomer induced financial problems and containing inflation are just a few of the issues Idaszak addresses in his brief report. His points include:

• “Interest on outstanding debt will claim a larger share of the budget, from 4.2% this year to about 11% by 2013.”

• “The inevitable consequence will be higher taxes — or less money to spend on everything else, from food safety to road building, education, health care, energy, the environment and even homeland security and defense.”

• “Uncle Sam will have to borrow much more to foot the tab. Long-term Treasury rates will climb to attract the investors needed. … To coax foreigners to continue lending the U.S. money, interest rates will move several percentage points higher.”

• “There won’t be any escape from inflation, either. All the cash that the Federal Reserve is pumping into the ailing economy will create excesses as consumer spending recovers and the slack in the economy is absorbed, a shift likely to begin in early 2011.”