US deficit 'to hit $1 trillion'

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By Steve Schifferes
Economics reporter, BBC News

The US economic is set to continue to shrink in 2009

The sharp slowdown in the US economy will push the federal budget deficit to more than $1 trillion, the non-partisan Congressional Budget Office (CBO) says.

The deficit of $1.186 trillion for the fiscal year ending on 30 September would be the largest on record.

The projected deficit does not include the extra $800bn spending being planned by US President-elect Barack Obama.

But it highlights the deep economic difficulties facing Mr Obama when he is inaugurated on 20 January.

The CBO says that the slowing economy will lead to the US budget deficit more than doubling from last year's figure of $455bn.

WHY DEFICITS MATTER Increased debt costs for government Increased risk of inflation Long-term pressure on dollar Could lead to higher taxes and spending cuts later

And it says that, although the economy may recover by 2010, the deficit will still be more than $700bn, and it projects an accumulated deficit of nearly $2 trillion over the next five years.

As a percentage of total economic output, the deficit will be 8.3% of GDP. The previous record was 6% of GDP, set in 1983.

The major reason for the deficit is the sharp decline in tax revenues, projected to fall by 6.6%, as well as the increase in spending due to the cost of the recession and the bail-out.

Rescue plan

Mr Obama is trying to build a bipartisan consensus on the economy

The size of the budget deficit makes the shape of Mr Obama's stimulus package more of an issue.

Mr Obama has described America's economy as "very sick" and has said that the situation is worsening.

And he warned: "Potentially we've got trillion-dollar deficits for years to come, even with the economic recovery that we are working on at this point."

He has been urging Congressional leaders to back his stimulus package, which is expected to cost between $700bn and $800bn over two years and create up to three million jobs.

The plan would include about $300bn in tax cuts, as well as additional spending on infrastructure and aid to the states.

But he has said that he is determined to present plans to bring the long-term budget outlook into balance, and has appointed Nancy Killefer to the new post of governmental performance officer, charged with improving efficiency in government.

He said that in order to rebuild trust in government, it was necessary to "put government on the side of taxpayers and everyday Americans".

However, Mr Obama is also committed to major reforms of health care, education and the environment, all of which could increase spending.

The US central bank, the Federal Reserve, has already cut interest rates to nearly zero in a bid to stimulate the economy.

But even former Republican economists, such as Martin Feldstein, who advised Ronald Reagan, now say that a fiscal stimulus is needed because of the dysfunctional credit markets.

"The heavy lifting will have to be done by increased government spending," he said in a paper to the American Economic Association.

Job losses

Meanwhile, further signs of the weakening of the US economy are likely this week.

Unemployment is rising as the slowdown bites

The US Labor Department will release its December employment report on Friday. Many economists are expecting the jobless figure to rise by 500,000, bringing the total US job losses for 2008 to about 2.5 million.

Mr Obama will be under pressure to allocate further funds to bail out the auto industry, with GM and Chrysler both having received short-term funding from the government for the next three months.

The automakers say that up to three million jobs could be at risk if the industry goes under.

In addition, the budget deficit does not include some $350bn in bail-out funds for the financial sector which have not been spent so far - half of the $700bn package approved in October.

In the longer run, the government also faces sharply higher costs for social security retirement payments and health care, as the Baby Boomer generation retires over the next decade.

76-year-old stabbing victim well-known among Lao-Cambodians

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February 2, 2009
Corina Knoll
Los Angeles Times (California, USA)

A 76-year-old woman stabbed to death in her Long Beach home was a well-known figure in the Cambodian and Laotian communities, her son said today.

The body of Leam Sovanasy, who lived with relatives in the 1400 block of Peterson Avenue, was discovered by a relative about 11 a.m. Saturday, police said. She had been stabbed multiple times in her upper body. Sovanasy was ethnically Laotian but born in Cambodia, said her son, who asked not to be named for legal reasons.

She arrived in the United States with seven children more than 20 years ago. Many other families from her village have since immigrated to Long Beach, forming what Sovanasy’s nephew, Sam Bunlot, called a local Lao-Cambodian community.

“Most of us, we know each other,” said Bunlot, 40. “She’s one of the elders, so she’s very popular.”

Grieving family members said they had no idea why Sovanasy, the grandmother of 25, would be attacked in her home. Investigators are trying to determine a motive for the killing, said Long Beach Police Department spokeswoman Lisa Massacani.

“She devoted her life to Buddhism,” Bunlot said. “All she did was try to be a good person.”

GOP circulates plan to cut the cost of mortgages

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WASHINGTON – Senate Republicans circulated a sweeping plan to drive down the cost of mortgages by expanding the federal government's role in the industry, officials said Monday night as debate opened on an economic stimulus bill at the top of President Barack Obama's agenda.

The emerging proposal also relies on a bigger and more widely available tax break for homebuyers than is now available, those officials added as Senate Republicans staked their claim to a different type of economic recovery measure than Democrats and the administration favor.

Democrats already are under pressure from moderates in their own party to scale back spending in the $885 billion bill, and Obama met with party leaders at the White House late in the day to discuss strategy.

"What we can't do is let very modest differences get in the way" of swift enactment of the legislation, Obama said several hours earlier as new layoffs rippled through the economy and the Commerce Department reported an unexpectedly large sixth straight drop in personal spending.

In the Capitol, Republicans said their goal was the change the bill, not to block it. "Nobody that I know of is trying to keep a package from passing," said Sen. Mitch McConnell of Kentucky, the Republican leader.

"We need to fix housing first," he said. Republicans are expected to seek a vote on their proposals this week as part of the debate on the overall stimulus measure.

Officials said the GOP was coalescing behind a proposal designed to give banks an incentive to make loans at rates currently estimated at 4 percent to 4.5 percent. Fannie Mae and Freddie Mac, which were seized by the federal government in September, would be required to purchase the mortgages once banks have made them to consumers.

Officials said loans to credit-worthy borrowers on primary residences with a mortgage of up to $625,000 would qualify, including those seeking to refinance their current loans.

Separately, Republican officials said they intended to press for a $15,000 tax credit for homebuyers through the end of the year. Current law permits a $7,500 tax break and limits it to first-time homebuyers.

Republicans generally dislike government intervention in the workings of the private marketplace, but their opposition has eroded in recent months as the crisis in the financial industry and economy have deepened.

The officials who described the emerging proposal did so on condition of anonymity, saying they were not authorized to discuss it.

McConnell also said Republicans favor cutting the two lowest tax brackets as a way to " put money back in people's hands directly." If adopted, that would reduce the tax rate from 10 percent to 5 percent for the first $8,350 in individual income for the current year, and $16,700 for couples. The tax rate would be lowered from 15 percent to 10 percent on income between $8,351 and $33,950 for individuals and between $16,001 and $67,900 for couples.

Obama and the Democrats favor a different approach. The legislation provides a cut of $500 for workers and $1,000 for working couples, even if they do not earn enough in wages to pay income taxes.

Separately, Democrats privately conceded they may wind up reducing spending that has come under withering fire in recent days from Republicans.

Last week, House Democrats jettisoned money to reseed the National Mall and a provision to make it easier for states to offer family planning services to the poor under the Medicaid program.

Democrats hold a commanding 58-41 majority in the Senate, but some of their more moderate and conservative members are pushing to trim spending. There was additional pressure on the leadership in the form of bipartisan amendments to reduce spending.

As a result, the outcome of the debate on the measure is far less clear than it was in the House, where leaders had the votes to enforce their will.

The political environment also has changed since House Republicans voted unanimously against the bill last week. Public opinion polls show strong support for a package of tax cuts and spending increases to remedy the worst economic downturn since the Great Depression. But Obama is now on the spot, having pledged personally to GOP lawmakers that he would make changes in the bill once it reached the Senate.

The $885 billion Senate bill is larger than the House-passed version, principally because it includes a one-year tax cut to prevent upper-middle income taxpayers from falling victim to the Alternative Minimum Tax. The so-called AMT initially was created a generation ago to make sure the super-wealthy did not avoid taxation, but inflation has expanded its reach over the years.

In all, the Senate measure provides for roughly $560 billion in spending and $325 billion in tax cuts.

Much of the spending is in the form of health care for the poor; education funds for the states to avoid the impact of their own budget cuts on schools, and more money for food stamps, unemployment insurance and worker retraining funds.

Additionally, the bill includes a down payment on two of Obama's domestic initiatives. They include expanding health information technology and providing spending and tax cuts to encourage development of new jobs while increasing reliance of alternative energy sources.

Whatever the breakdown, Republicans said there was far too much spending, and not enough in tax cuts.

Obama made his comments at the White House, where he met with Vermont Gov. Jim Douglas, the Republican vice chairman of the National Governors Association.

"If I were writing it, it might look at little different," said Douglas, trying to keep faith with Republican critics in Congress while saying his state needed help. "But the essence of a recovery package is essential to get the nation's economy moving."

The latest layoffs were announced by Macy's, the Cincinnati-based department store chain, which said it was cutting 7,000 jobs.

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Associated Press writers Ben Feller, Andrew Taylor, Liz Sidoti and Alan Fram contributed to this story