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The Obama administration is bracing for a political backlash on Tuesday when it issues national debt numbers showing federal debt rising by $9,000bn over the next decade – significantly higher than the forecast it made earlier this year.
The revision, which will add $2,000bn (€1,400bn, £1,200bn) to the White House’s initial projection made in February, comes amid growing public jitters about the scale of US national debt, with one recent opinion poll showing Americans giving higher priority to reducing deficits than to reviving the economy.
According to Goldman Sachs, the need for a new stimulus will be most acutely felt in 2011 when the combination of the expiration of the tax cuts George W. Bush enacted in 2001 and 2003 and the withdrawal of the stimulus will reduce GDP growth by 1.6 per cent.
Some economists believe the growing likelihood of tax increases a few years from now to mitigate the deficit may discourage consumer spending and business investment today.
The prospect of sustained large deficits also makes it harder for the US central bank to provide further monetary stimulus. Inflation concerns have been raised by the combination of large projected deficits and unorthodox Federal Reserve actions. Foreign investors in particular worry that the Fed will end up monetising government debt over the medium term.