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Monday, July 28, 2008

Bloomberg.com: Worldwide

July 28 (Bloomberg) -- The U.S. budget deficit will widen to a record of about $490 billion next year, an administration official said, leaving a deep budget hole that will constrain the next president's tax and spending plans.

The projected deficit for the fiscal year that begins Oct. 1 is higher than the $407 billion forecast by President George W. Bush in February. The bigger shortfall reflects dwindling tax receipts because of the U.S. economic slowdown, the cost of a $168 billion economic stimulus package and spending on the wars in Iraq and Afghanistan.

``We've already seen a pretty sharp cooling in tax receipts, and it's just going to continue into next fiscal year,'' Stephen Stanley, chief economist at RBS Capital Markets, said in a telephone interview.

The deficit projection will burden either Republican John McCain and Democrat Barack Obama, the presumptive presidential nominees of the major political parties, with a constricted budget that has little room for cutting taxes or increasing spending. The next president also will inherit the deepest housing recession in a generation, fears of a crisis in the banking industry, a falling dollar and high energy prices.

Campaign Promises

McCain has promised corporate and individual tax cuts that are projected to cost $4.2 trillion over 10 years along with spending to promote U.S. energy independence. Obama is vowing to enact a plan for universal health care, middle-class tax cuts and proposes spending on education and job training.

Instead, both likely will be forced to put their campaign promises on hold to reinvigorate the economy and drive down the deficit while also grappling with left-over foreign policy problems such as the wars and the nuclear ambitions of Iran and North Korea.

The official, who asked not to be named, also confirmed a report in USA Today that the deficit this year will be less than the $410 billion estimated in February. The White House budget office will release its mid-session review of the government's balance sheets at 1:45 p.m. today.

Treasuries rose as the forecast for a higher budget deficit and a rise in European bond prices led to increased speculation the U.S. economy will slow amid decreasing global growth.

The deficit is one of the ``underlying themes that people are nervous about. It's just more bad news, and that leads to more buying of Treasuries,'' said Charles Comiskey, co-head of U.S. Treasury trading in New York at HSBC Securities USA Inc.

Deteriorating Budget

The shortfall reflects a deterioration of the budget over the past seven years. Bush inherited a budget surplus of $128 billion when he took office in 2001. The budget worsened almost immediately, because of recession, the Sept. 11 attacks, the beginning of the war in Afghanistan and, later, the war in Iraq that began in March 2003.

Bush recorded his first deficit a year after being sworn in, and it widened to the current record of $413 billion in 2004.

Five months ago, the administration projected a shortfall of more than $400 billion this year and next, reflecting a struggling economy, and forecast a recovery to a $160 billion deficit in 2010, declining to $96 billion in 2011 and finally a $48 billion surplus in 2012.

War Costs

The current projections may understate the deficit next year because the administration hasn't requested money to prosecute the wars for the full year, leaving that to the next president. Military operations in Iraq and Afghanistan now are costing about $10 billion to $12 billion a month.

Asked today if the administration still believes it's on a path to a balanced budget by 2012, White House press secretary Dana Perino said , ``I believe so, yes.''

She called the deficit ``temporary and manageable.''

The Bush administration and Congress also haven't dealt with the largest long-term fiscal problems: the growing costs of Medicare, Medicaid, and Social Security. Those three programs consumed an estimated 41 percent of the federal budget in 2007.

Obama is meeting today with his top economic advisers ``on America's pressing economic challenges,'' his campaign said. The Illinois senator was to meet with business and labor officials on oil, food and other commodities, topped with discussions with investor Warren Buffett, former Chairman of the Federal Reserve Paul Volcker, and former Treasury Secretary Robert Rubin, among others.

McCain Meetings

McCain, an Arizona senator, was scheduled to talk about the economy at town-hall meetings with voters in Nevada and Wisconsin.

Record gasoline prices, plunging home values and shrinking credit access have thrust the economy to center stage. The Labor Department this week may report a seventh straight month of job losses.

House Budget Committee Chairman John Spratt, Democrat of South Carolina, took the administration to task for a record deficit, citing news accounts.

``If these reports prove accurate, they confirm the dismal legacy of the Bush administration: under its policies, the largest surpluses in history have been converted into the largest deficits in history,'' Spratt said in an e-mailed statement.

A Bloomberg survey of 28 analysts completed July 25 showed the average estimate for the deficit at $447 billion next year and $407 billion this year
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