Unemployment benefits and falling tax incomes have widened the deficit The US budget deficit has moved above $1 trillion (£616bn) for the first time - with three months of the financial year remaining, official data show. The government stepped up spending to counter the recession, and the bailout of financial institutions has taken a huge chunk out of government finances. Falling tax revenues and unemployment benefit spending have also contributed. The figure compares with $455bn for the whole 2007/8 financial year, but the 2008/9 deficit was expected to soar. A budget deficit can impede spending on programmes such as health and education. Increased anxiety Congress has already approved a $700bn financial bailout and a $787bn economic stimulus package to try and jump-start a recovery. 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 last week a senior US Democrat said legislators must be willing to consider the possibility of a second economic stimulus package. But even before the global economic slowdown, the US had moved into deficit - driven largely by tax cuts and the cost of the Iraq war. The Treasury figures showed that the budget deficit so far in the financial year, which runs to 30 September, was $1.086 trillion - a widening of $94.316bn from the month before. And the situation has led to increasing anxiety among the foreign buyers of US debt, including China. It may force the Treasury to pay higher interest rates to those who buy its debt, to make it a more attractive long-term prospect, observers say. "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."



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