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TheStreet Open House

US Runs A 4th Straight $1 Trillion-plus Budget Gap

â¿¿ ROOTS OF THE PROBLEM

The 2012 budget gap signals a slight recovery from the deficit explosion that hit in late 2008. That's when the financial crisis erupted and the recession that began in December 2007 was tightening its grip.

The sinking U.S. economy caused tax revenue to plummet. And federal spending surged. The money went to provide laid-off workers with unemployment insurance and food stamps. The government also spent more to provide economic stimulus programs and to stabilize the financial system.

Before it escalated, the deficit had been as low as $161 billion in 2007. By 2009, it had peaked at $1.4 trillion. Since then, the improvement has been slight but steady. Tax revenue is still less than in 2007.

â¿¿ THE OUTLOOK

The aging of the vast baby boom generation is raising government spending on Social Security and on Medicare and Medicaid.

A still-weak economy, along with tax cuts, have meanwhile reduced government revenue. Over the past three years, revenue has fallen below 16 percent of gross domestic product â¿¿ the value of all goods and services produced in the United States. It's the lowest such percentage since 1950. That isn't enough to sustain spending, which has been exceeding 22 percent of GDP.

And so the government has borrowed to make up the gap. And debt piles up, year after year. It's reached $11.3 trillion â¿¿ $16.2 trillion if you include money the government has borrowed from itself, mostly revenue from Social Security.

Unless something changes, the Congressional Budget Office warns, the federal debt would reach a level that is "unsustainable from both a budgetary and an economic perspective."

Still, Treasury is benefiting from record-low interest rates. Those rates make it cheaper to borrow. Interest payments on the debt fell 2 percent this year to $223 billion.

For the current 2013 budget, the administration predicts a deficit of $991 billion. Its slightly brighter outlook reflects lower spending on defense, health care, unemployment benefits and Medicaid payments to states â¿¿ all of which declined this year.

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