Newspaper article The Christian Science Monitor

How Returning Deficits Impact Main Street ; the Estimated $165 Billion Shortfall Could Affect Mortgages and Social Security

Newspaper article The Christian Science Monitor

How Returning Deficits Impact Main Street ; the Estimated $165 Billion Shortfall Could Affect Mortgages and Social Security

Article excerpt

Largely obscured by the slumping stock market and corporate crime wave, something is going on in Washington that could push up your mortgage payment, make a job harder to find, and make Social Security's problems tougher to solve.

For the past four years, the US government actually managed to live within its means, paying current bills out of current income. Instead of borrowing, it paid off some of the debts it had run up.

But now, government spending is soaring, income is dropping, and the government will once again run in the red - with new estimates putting the budget deficit this year up sharply to $165 billion. Most private forecasters say the problem will get worse next year.

On Capitol Hill this week, Federal Reserve Chairman Alan Greenspan said that federal budget surpluses had helped hold down interest rates and spur economic growth. While noting that some factors leading to the return of deficits are temporary, he warned, "Unfortunately, there are also signs that the underlying disciplinary mechanisms that formed the framework for federal budget decisions over most of the past 15 years have eroded."

The war on terror has obviously played a role in the US financial picture, with defense spending up almost 16 percent so far this year, according to figures from Economy.com, a consulting firm. But domestic spending has also soared, with Medicare up 10 percent, Medicaid up 15 percent, and unemployment programs up 70 percent.

And as elections have approached, Congress has loosened the purse strings. For example, it passed a farm bill estimated to cost $190 billion over 10 years and is now debating costly prescription-drug benefits. Meanwhile, President Bush, who ran as a fiscal conservative, has yet to veto a single spending bill.

"If you have a deficit for one year, that is not a big deal," says Gus Faucher, senior economist at Economy.com. "The concern is if you have a structural imbalance - a long-term divergence between taxes and spending."

Deficits for a decade?

And that is what some private forecasters see. "We are looking at budget deficits through the end of the decade and into the middle of the next," says Stanley Collender, managing director of the Federal Budget Consulting Group at Fleishman-Hillard Inc. "Higher government borrowing almost certainly means higher interest rates for the average person."

For example, he says, "In a year or two, as adjustable-rate mortgages that people refinanced last year start to come due, they are going to adjust upwards by two full percentage points or more. And that is the equivalent of putting a tax on homeowners."

Mitchell Daniels Jr., director of Mr. Bush's Office of Management and Budget (OMB), takes a more optimistic view of the government's financial outlook.

The current budget deficit - at 1. …

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