GLOBAL DEFICIT EFFECTS

Just like its citizens, the U.S. government doesn’t save much and has a penchant for borrowing. The United Nations is so concerned about the growing U.S. budget deficit and the accompanying trade deficit that it called upon other countries recently to help straighten out America’s finances, which risk destabilizing the world economy.

In an otherwise positive assessment of the global economy for 2005, the U.N. warned that strong global growth could be held hostage to a falling U.S. dollar and U.S. trade imbalances. Here’s the problem: The United States is going farther into debt by the day. Increasingly, this debt, in the form of U.S. Treasury bonds, is held by foreign investors.

Since 2001, foreigners have purchased more than 90 percent of new Treasury-issued securities. Foreigners now own 43 percent of U.S. privately held national debt, up from 30 percent in 1991. As the value of the dollar drops, the value of these investments declines meaning that those holding the bonds are less inclined to buy things, including items made in the United States. This worsens the trade deficit.

The U.N. suggests that other countries help the United States by expending some of their national savings to boost demand for goods from the United States and elsewhere and by adjusting exchange rate policies to boost the dollar. There is also much than can

be done at home.

The first is to boost both government and private savings in the United States. “Some correction of the United States’ fiscal deficit and an improvement in its private savings seems indispensable,” the U.N. wrote in “The World Economic Situation and Prospects 2005.” “It is necessary to ensure that global growth and stability are sustained.”

The White House last week announced that the 2005 federal budget deficit was expected to be $427 billion, exceeding last year’s record $412 billion. While the number is alarming too much should not be read into it. That’s because the administration is expected to initially put out a very high number to blunt lawmakers’ calls for increased federal spending and to later take credit for reducing the red ink by reining in costs or cutting programs.

Still, members of Congress should seek to shrink the budget shortfall, while keeping in mind there are two sides to the ledger: expenditures and revenues. Government expenditures have grown rapidly, in large part due to the more than $225 billion earmarked for military operations and rebuilding in Iraq and Afghanistan.

At the same time, revenues have shrunk because the government is collecting less tax revenue due to two rounds of tax cuts, something the president wants to make permanent.

The United Nations weighed in on this and suggested that the tax cuts be reversed to reduce the deficit. While this won’t happen, the implications of continuing federal deficits, for the U.S. and global economy, should spur lawmakers to carefully consider future tax cuts and spending requests.