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TheStreet Open House

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

Many private forecasters are less optimistic about the deficit. Analysts at JPMorgan foresee a $1 trillion budget gap for 2013. That would mark a fifth straight year of deficits of at least $1 trillion.

All that assumes the country avoids tax increases and deep spending cuts that take effect next year unless Congress reaches a budget deal.

â¿¿ THE THREAT

Over time, big government debts can damage the economy. The economists Kenneth Rogoff of Harvard University and Carmen Reinhart of the Peterson Institute for International Economics have found that growth tends to slow sharply once national government debt reaches 90 percent of GDP.

When the government borrows heavily, it can drive up interest rates and divert financing that would have been available for private companies.

Rising debt levels can cause some investors to lose confidence in the government's ability to pay its bills. They would demand substantially higher interest rates.

Higher rates would discourage businesses and consumers from borrowing, thereby slowing the economy. The government would collect less in taxes and spend more on unemployment benefits and other social programs.

That creates a vicious cycle like the one that has entrapped European countries such as Spain, Italy and Greece; Rates are rising, economies buckling, budget deficits widening and debts swelling. So far, that hasn't happened to the United States.

Investors, worried about the troubles in Europe, have been eager to buy Treasury debt, allowing the federal government to borrow at historically low rates.

â¿¿ THE FIX:

If he's elected to a second term, Obama has pledged to reduce the government's deficits over the next 10 years by about $4 trillion. Obama says he would reduce the growth of federal spending â¿¿ slowly, to avoid triggering another recession. He also wants to end the Bush-era tax cuts on income that exceeds $200,000 people for single taxpayers and $250,000 for couples.

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