U.S. budget gap tops $1 trillion

WASHINGTON - Nine months into the fiscal year, the federal budget deficit has topped $1 trillion for the first time.

The imbalance is intensifying fears about higher interest rates and inflation, and already pressuring the value of the dollar. But there also is concern about trying to reverse the deficit, by reducing government spending or raising taxes, in the midst of a harsh recession.

The Treasury Department said yesterday that the deficit in June totaled $94.3 billion, pushing the total since the federal budget year started in October to nearly $1.1 trillion. The gap last month was the first deficit for any June since 1991.

The deficit has been propelled by the huge sum the government has spent to combat the recession and financial crisis, combined with a sharp decline in tax revenue. Paying for the wars in Iraq and Afghanistan also is a major factor.

"This is a difficult pill to have to swallow," said Richard Yamarone, director of economic research at Argus Research Corp. in New York. "The economy and banking system need these funds to recover, yet it will ultimately hit Americans' wallets hard. It's a necessary evil."

The country's soaring deficits are making Chinese and other foreign buyers of U.S. debt nervous, which could make them reluctant lenders down the road. That could force the Treasury Department to pay higher interest rates to make U.S. debt attractive longer-term.

"These are mind boggling numbers," said Sung Won Sohn, an economist at the Smith School of Business at California State University. "Our foreign investors from China and elsewhere are starting to have concerns about not only the value of the dollar but how safe their investments will be in the long run."

Government spending is on the rise to address the worst financial crisis since the Great Depression and an unemployment rate now at 9.5 percent.

Congress already approved a $700-billion financial bailout and a $787-billion economic stimulus package to try to jump-start a recovery, and there is growing talk among some Obama administration officials that a second round of stimulus may be necessary.

This has many Republicans and deficit hawks worried that the U.S. could be setting itself up for more financial pain if interest rates and inflation surge. They also are raising alarms about additional spending the administration is proposing, including its plan to reform health care.

President Obama and other administration officials, including Treasury Secretary Timothy Geithner, have said the U.S. is committed to bringing down the deficits once the country has emerged from the current recession and financial crisis.