Tuesday, March 07, 2006

U.S. Government Keeps Growing

The preliminary budget report for the U.S. federal government from the Congressional Budget Office showed an increase in the deficit despite surging tax revenues. This means that both government revenues and spending faster than GDP, implying reduced economic freedom in America. It also bodes ill for the future fiscal outlook. When the U.S. economy in a likely not too distant future turns down and asset price inflation slows or even reverses, revenues will stagnate or perhaps even fall. Combined with the fast spending growth this will mean that the deficit will rise sharply from today's fairly high levels.

Meanwhile, Treasury Secretary John Snow have again pleaded with Congress to raise the debt limit. He did so already in the end of December 2005, warning that if the limit of $8,184 billion wasn't raised it would be reached in February this year. It's now March, and the limit haven't been raised and it would have been reached hadn't the Treasury Department resorted to various accounting tricks, such as tapping into various funds intended for other purposes. But Snow now warns that they're running out of tricks and if Congress doesn't raise the limit it will be breached the week of March 20, something which will mean that the federal government will default on its debts for the first time ever, something which would permanently raise its future borrowing costs.


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