WASHINGTON: Not since World War II has the federal budget deficit made up such a big chunk of the US economy. And within two or three years, economists fear the result could be sharply higher interest rates that would slow economic growth. The budget plan President Barack Obama sent Congress Monday foresees a record deficit of $1.65 trillion this year. That would be just under 11 percent of the $14 trillion economy - the largest proportion since 1945, when wartime spending swelled the deficit to 21.5 percent of US gross domestic product. The danger is that a persistently large gap in the budget could threaten the economy. Investors would see lending their money to the US as riskier. So they'd demand higher returns to do it. Or they'd simply put their cash elsewhere. Interest rates on mortgages and other debt would rise as a result. And if borrowing turned more expensive, people and businesses might scale back their spending. That would weaken an economy still struggling to lower unemployment, revive real estate prices and restore corporate and consumer confidence. So far, it hasn't happened. It's still cheap for the government to borrow money and finance deficits. But economists fear the domino effect if all that changes. "The moment when markets react negatively to our budget deficit cannot be known in advance, but we are absolutely in the danger zone," said Marvin Goodfriend, an economics professor at Carnegie Mellon University's Tepper School of Business. Higher interest rates would also raise interest payments on the federal debt. It would be costlier for the government to finance its operations. The interest payments themselves could then make the deficit increase, creating a vicious cycle. Under the projections in Obama's budget, the deficit as a share of the overall economy would narrow from 10.9 percent this year to 7 percent next year and eventually to 2.9 percent by the 2018 fiscal year. But after that, in the remaining years of this decade, the deficit would widen slightly as a percentage of the economy. It would average about 3.1 percent because of escalating costs for programs like Social Security and Medicare as baby boomers age and receive benefits. Economists generally say cutting the deficit to about 3 percent or less of the economy would be healthy. Deficits at that level are considered "sustainable" - meaning they could be easily financed and wouldn't make investors nervous about the government's finances. Most economists don't think the deficit should be cut deeply now. They say the economy remains so fragile - unemployment is at 9 percent - that it needs big government spending to invigorate growth.
