WASHINGTON Uncle Sam's bloated budget deficits should they persist could over time lead to higher interest rates on mortgages, car loans, student loans, business loans and other types of borrowing.
The White House's budget office on Monday estimated that next year's budget deficit will hit a record $482 billion and that doesn't even account for some $80 billion in war costs.
If the projection proves correct, it would shatter the old record of $413 billion set in 2004. The Bush administration foresees the government continuing to rack up the red ink into 2011.
This year's deficit is expected to total $389 billion.
The U.S. borrows money to service the $9.5 trillion national debt by auctioning Treasury securities. If investors who buy those securities view this government debt as riskier than it is currently, they could demand a higher return from the U.S. to hold that debt. If the country's borrowing costs go up, it can ripple throughout the economy, raising borrowing costs for home buyers, car buyers, students as well as for businesses.
"The price that Uncle Sam pays to borrow money is the baseline for many consumer and business loans. If the price that Uncle Sam pays increases, then the price for the rest of us to borrow increases," said Greg McBride, senior financial analyst at Bankrate.com.
For now, economists believe such a scenario would be more likely to play out gradually over time.
"It's most likely to move at a glacial pace. You wake up and say, 'Wow, the needle has moved under our noses,"' McBride said.
If investors especially foreign investors who have big holdings in U.S. securities were to get spooked and suddenly sell their U.S. investments, however, interest rates could shoot up quickly. Analysts give slim odds to such a worst-case scenario.
Still, higher interest rates also make it more expensive for the government to service, or make payments, on its debt, and that can push up the budget deficit more.
"It's a vicious cycle," said Brian Bethune, economist at Global Insight.
During the first nine months of this budget year, interest on the public debt was $377.3 billion the fourth-highest spending category. Ahead of it: programs from the Health and Human Services Department, including Medicare and Medicaid, $520.4 billion; Social Security, $491.7 billion; and military, $439.5 billion.
When the government is borrowing more, it "crowds out" or makes it more difficult for private companies to obtain the financing they need to expand operations and make other capital investments, including hiring more people, which is an important ingredient to national economic activity.
"If the government comes in there and is borrowing huge chunks of capital to fund the deficit then that can stifle the economy," Bethune said.
The Treasury Department announced Monday that it planned to borrow $171 billion in the current July-September quarter, which will be the second-largest borrowing amount on record, exceeded only by the $244 billion it borrowed to finance the government's growing debt burden in the January-March period.
Housing, credit and financial debacles have badly bruised the economy. The White House predicts the economy will grow by only 1.6 percent this year. That's down from a 2.7 percent growth projection made in February. Growth should pick up a bit next year to 2.2 percent, but that would still be considered a subpar performance.
The last time the government ran a surplus was in the 2001 budget year. It was the last of a four-year stretch of budget surpluses. Those surpluses came when the country's finances were bolstered by a 10-year period of uninterrupted economic growth, the longest in U.S. history.