Now It's the Morning after the Night before; Economic Hangover: Obama Will Come into Power Facing the Worst Fiscal Backdrop since the Election of Ronald Reagan in the Early 1980s

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Byline: Sam Fleming

ON TUESDAY night Barack Obama proclaimed he will rebuild recession-blighted America 'block by block, brick by brick, calloused hand by calloused hand'.

It was a stirring pledge, but his administration may be forced to deliver on it with one arm shackled behind its back.

Like Britain, America is heading into a deep economic downturn with empty public coffers. Economists say the Federal deficit could hit $700bn next year, while the national debt is headed towards an extraordinary $6trillion ([pounds sterling]3.7trillion).

As a result, Obama will be choosing the Oval Office's new Presidential rug in a time of fiscal austerity, not plenty.

The position will only get worse in the coming years as social security spending rises and tax revenues evaporate.

This will dramatically constrict the new President's reform agenda.

In particular, his $65bn-a-year programme to broaden the provision of public healthcare and plans to propel America towards energy-independence will be tough to deliver against a backdrop of plunging tax revenue.

And it is far from clear how Obama's hopes of easing the tax burden on people earning less than $250,000 a year will tally with an expected slump in tax revenue.

Economist Rob Carnell of ING said: 'America's fiscal problems are enormous. They will find it difficult to find the money to go out and do something fancy.' Martin Weale, director of the National Institute of Economic and Social Research, said: 'It is not a good position to be in. Fiscal policy has been run in the hope that something positive will turn up, but what did turn up was a nasty surprise.' In recent weeks Republicans have tried to stoke fears that America would face a fiscal blow-out under big-spending Democrats. Figures such as News Corp boss Rupert Murdoch have claimed Obama will erect trade barriers, making the economic situation even worse.

Yet Bush's profligate spending and millionaire-friendly tax cuts have left the Republicans ill-placed to attack the Democrats. Having inherited the biggest Federal budget surplus in history in 2001, Bush has managed to push government borrowing to the highest levels in the Group of Seven nations, at 4. …