New Debt Could Hamstring Obama
Sharp Rise in Treasury Borrowing Seen Pressuring New Programs, Tax-Cut Agenda

The U.S. government is on course for an unprecedented borrowing binge in coming months that could constrain President-elect Barack Obama's economic agenda.

The Treasury Department laid out near-term borrowing plans Wednesday, saying it expects to tap financial markets for $550 billion in the final three months of 2008 and another $368 billion in the first three months of next year by issuing Treasury securities with a wide range of maturities.

Economists project that total government borrowing could pass $1.5 trillion in the fiscal year, which ends next September, pushing up the government's total debt burden by more than 25% in one year.

The sharp rise poses a potential dilemma for Mr. Obama's ambitious agenda. Few economists believe the Treasury will be constrained in the next year in its ability to manage its rising borrowing needs or in advancing another fiscal stimulus program. But in the long run, rising government debt could make it harder for Mr. Obama to pursue new spending and tax-cut programs aggressively.

"I don't think that anything on the stimulus end will be constrained by these deficits," said David Greenlaw, a Morgan Stanley economist. "But if you're talking about health-care reform and some of these longer-term programs, there is some constraint there."

A range of factors are behind the mammoth borrowing increase. The recession has slowed individual income and corporate income-tax receipts. Outlays are rising for unemployment insurance, food stamps and other programs meant to be an economic stabilizer. Meantime, the Treasury is embarking on a $700 billion program to buy distressed assets from Wall Street and invest in financial firms and has already increased borrowing in support of Federal Reserve financial rescue efforts.

Furthermore, Congress is likely to pass a new economic stimulus plan in the weeks ahead that could exceed $150 billion.

"We're really expecting private, foreign, domestic investors and foreign government investors to increase their Treasury debt holdings by a huge proportion," said Rudolph Penner, an Urban Institute budget expert.

In theory, such a sharp increase in new supply of Treasury bonds and notes might jolt investors, pushing up interest rates. That hasn't happened so far, in large part because investors have been reluctant to hold riskier assets.

Yields on 10-year Treasury bonds -- at 3.7% -- are well below levels reached in mid-2007, when they briefly moved above 5%. Yields on 1-month Treasury bills, at less than 0.2%, represent almost costless borrowing for the U.S. government, and have served as a green light to policy makers for a new economic stimulus plan.

"A large fiscal stimulus package of $300-$500 billion appears to be required to prevent an even deeper economic slump than the one we are now forecasting," Goldman Sachs economists said in a recent report on the fiscal outlook.

Economists break into two camps on the longer-term threat of mounting budget deficits. One sees the debt as manageable compared to other countries' and to past U.S. debt levels.

Even with $1.5 trillion of new borrowing this year, the U.S. government's publicly held debt would amount to about 49% of gross domestic product, according to Morgan Stanley. That's much lower than Japan's government debt, which exceeds 100% of GDP. It also is below the U.S. peak of more than 100% reached after World War II.

As the economy improves and the financial crisis recedes, this camp holds, the deficit picture should improve.

Others warn that the current increase in borrowing is coming at the worst possible time because the budget picture is on track to darken as spending on Medicare, Medicaid and Social Security increase with the aging of the population.

"The problem is that over the next number of years, the long-run budget pressures are going to become more and more apparent," Mr. Penner says. "That is going to make it more and more difficult to reverse the deficits."

Write to Jon Hilsenrath at jon.hilsenrath@wsj.com