Budget Deficit may Hinder Obama's Economic Plan

Barack Obama earned the office of the presidency on a campaign that promised sweeping change. But are his lofty goals unrealistic, given the size of the federal deficit that he'll inherit?

To say that president-elect Barack Obama has a monkey on his back is like saying that John McCain has a few white hairs on his head. Obama spent months making promises to win votes, but now he faces an economic reality that will undoubtedly require him to reprioritize his agenda.

Deficit monkey

Obama's website states three priorities for the economy:  provide a tax cut for working families, give tax relief for small businesses and start-ups, and open up foreign markets to provide Americans with jobs. He also wants to fix the health care system, help at-risk homeowners avoid foreclosure, and shore up Detroit's automotive industry.

Unfortunately, the economy and the state of the federal budget have both deteriorated significantly since Obama and his advisors hashed out the details of this economic program. The credit markets have frozen, consumers have stopped spending, and unemployment has gone up. But the largest obstacle for the Obama administration will likely be the federal deficit, which has expanded to unmanageable proportions.

A problem that can't be ignored

Some estimate that the federal deficit for fiscal year 2009 could be as much as $1 trillion. This would follow a deficit of $455 billion in fiscal year 2008, which is currently the highest shortfall on record.

When spending outpaces tax revenue, the government must borrow to cover the shortfall. The additional borrowing, generated by way of selling bonds, increases the government's interest expense, which further restricts the spending available for other purposes. In fiscal year 2008, for example, the government spent more than $410 billion on interest; education spending in the same period was a meager $61 billion.

In over his head

The recent dramatic rise in the deficit raises two significant questions. First, is there enough global savings available to fund this increased government borrowing? Put another way, the government can't sell $1 trillion of bonds if there isn't $1 trillion of investor funds available to purchase them. And secondly, how will the government manage to cover the ever-growing interest burden, without cutting spending in other areas?

These issues would imply that the Obama administration and the Democratic Congress theoretically have no room for additional spending on an economic plan. This begs the question: what about those campaign promises? Some will argue that deficit spending will be necessary to fix the economy. But even assuming this argument is valid and enough bonds could be sold, economic stimulus spending will presumably take precedence over many campaign promises. And that priority shift may not sit well with the voters who expected those promises to be fulfilled.

Without a doubt, Obama has one of history's most challenging presidencies ahead of him.  Only time will tell if he conquers the monkey, or if the monkey conquers him.