Federal Deficit on Pace to Reach Record $1T

An annual deficit of $1 trillion would equal 6.7 percent of the gross domestic product, the economy's total output in a single year. That would surpass the previous postwar record in GDP terms of 6 percent sent in 1983 when Ronald Reagan was president.

House Financial Services Committee Chairman Rep. Barney Frank, D-Mass., right, and ranking member...

House Financial Services Committee Chairman Rep. Barney Frank, D-Mass., right, and ranking member Rep. Spencer Bachus, R-Ala., confer during a hearing on the Troubled Assets Relief Program (TARP) on Capitol Hill in Washington, Wednesday, Dec. 10, 2008. (AP Photo/Susan Walsh)

(AP)

And some economists think the annual deficit will be even higher. David Rosenberg, North American economist at Merrill Lynch, projected that it could reach $1.5 trillion, depending on how large an economic stimulus package is approved next year.

The Treasury Department plans to use $250 billion of the $700 billion program to make direct purchases of bank stock, providing the nation's financial institutions with an infusion of cash in the hopes that they will resume more normal lending practices.

The government provided $115 billion to eight of the largest financial institutions in October, including Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co. Treasury said Tuesday that overall it has provided more than $155 billion to 77 banks.

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Some analysts argue that the deficit is effectively lower than Treasury's figures because the government has received stakes in the banks in return for the capital. The government could get some or all of the money back when it sells those ownership stakes in the future.

The Congressional Budget Office said last week that accounting for the value of those stakes would reduce the combined deficit for October and November to $267 billion, rather than the $401.6 billion reported by Treasury.

Besides the $700 billion rescue package, the Treasury also is making purchases of mortgage-backed securities in an effort to bolster demand for these assets. Those purchases totaled $23.2 billion in November and $44.7 billion over the past two months.

Still, even budget hawks acknowledge that now is a good time for the government to step up its borrowing. With the Treasury Department paying the lowest rates on government debt in years, taxpayers will pay less in interest on all the new debt.