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Don't let America's red ink scare you

America is running a hefty budget deficit but fret not. The deficit sky is not yet falling.

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Former vice chairman of the Federal Reserve Board and Office of Management and Budget Director Alice Rivlin listens as former Sen. Pete Domenici, R-Minn., speaks at the Bipartisan Policy Center at a conference to launch its Debt Reduction Task Force in Washington on January 25. American's shouldn't fear federal red ink.

Madeline Marshall/UPI/Newscom

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When President Obama presents his budget for fiscal 2011 on Feb. 1, the cries of fiscal alarm over his projected deficit will be loud.

After all, last fiscal year's deficit surged to a record $1.42 trillion, more than three times the fiscal 2008 level. This year's is almost certain to set a new record for red ink.

But don't despair for the nation yet.

"It's absolutely not as hopeless as some of the deficit hawks would have you believe," says Josh Bivens, an expert at the left-leaning Economic Policy Institute in Washington and author of a 24-page paper defending the present need for a huge deficit to counter current economic weakness.

Lack of political consensus means deficit reduction will be "extremely hard," says James Horney, one author of a lengthy study by the Center on Budget and Policy Priorities. But "it can be done."

A key hurdle for politicians is that many taxpayers regard themselves as overtaxed. Here are some numbers to put that view in perspective.

•The federal tax burden is at its lowest level in the postwar period. As a proportion of gross domestic product (GDP), revenues stood at 15.8 percent in fiscal 2009, calculates the Congressional Budget Office (CBO). That postwar record reflects the combination of already low tax rates with the deep recession's impact on profits and earnings, which has further cut tax revenues.

•Federal spending, on the other hand, reached a new modern high of 26.8 percent of GDP, the nation's output of goods and services. The result: the massive deficit. The CBO projects revenue will rise to 18.7 percent of GDP in fiscal 2011, as the economic recovery progresses. Spending will decline in terms of GDP to 22.8 percent, a bit above usual.

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