By Emily Kaiser
WASHINGTON (Reuters) - The U.S. budget deficit hit a record $1.4 trillion in the just-ended fiscal year, the government said on Friday, as the deep recession and a series of bank rescues cut a gaping hole in public finances.
The tally was $162 billion smaller than the White House had forecast in August, but it still amounted to 10 percent of total U.S. economic output, the most for any budget shortfall since World War Two.
President Barack Obama has pledged to rein in high budget deficits by addressing long-term challenges like health care and energy costs in a fiscally responsible way.
But his critics argue that the healthcare reform efforts under consideration would add to the budget strain, and they pointed to the large deficit as cause for concern.
"Democrats in Washington are now calling for adding yet another quarter-trillion dollars to the deficit on health care spending alone," Senate Republican leader Mitch McConnell said. "Congress simply can't continue acting like a teenager on a spending spree with their parent's credit card with no regard to who pays the bill."
In August, the White House had forecast a $1.58 trillion deficit. The figure came in smaller than expected largely because of lower-than-expected spending out of the government's $700 billion financial rescue fund.
Still, it was more than three times as large as the $459 billion deficit racked up in the prior fiscal year.
For September alone, the deficit came in at $46.6 -- a record for the month that marked the first time ever the United States has seen 12 consecutive months of budgetary red ink. The government normally runs a surplus in September.
TREASURY OUTSPENDS DEFENSE
Rescuing the economy and some of the country's biggest banks from the worst recession since the Great Depression took a toll on U.S. finances, and the White House has forecast deficits of more than $1 trillion through fiscal 2011.
"Future deficits are too high, and the president is committed to working with Congress to bring them down to a sustainable level as the economy recovers," Treasury Secretary Timothy Geithner said in a statement.
The $787 billion stimulus package Congress passed in February and the financial rescue fund approved last year together accounted for 24 percent of the year's deficit total.
Outlays from the Treasury Department reached $703 billion, exceeding the $647 billion spent by the Defense Department. The Pentagon is typically by far the largest single budget item.
In the short term, the state of the budget depends a great deal on the health of the economy.
If the recovery is sluggish and unemployment stays high, as some forecasts predict, spending on jobless benefits will remain high and revenues could come in lower than the White House expects.
But if growth comes in stronger than predicted and job creation resumes, the gap could be narrower.
Peter Orszag, the White House budget director, said that as part of the fiscal 2011 budget policy process "we are considering proposals to put our country back on firm fiscal footing." He did not provide specifics.
Senate Budget Committee Chairman Kent Conrad said health care reform that "bends the long-term cost curve" was critically important to putting the country back on a sound long-term fiscal path.
The large deficit has pushed up U.S. government debt issuance, which is likely to remain high in the coming years as well. So far, there has been ample investor appetite for U.S. debt, both from domestic and foreign investors, which has helped to keep borrowing costs low.
However, investors are keen to see the United States take steps to shore up its finances once the economy is healed, and if concerns grow about long-term debt sustainability, interest rates may rise, adding to the U.S. debt burden.
The U.S. dollar has been falling on foreign exchange markets, suggesting a growing nervousness among some investors over Washington's fiscal path.
Geithner told CNBC television earlier on Friday that the United States must live within its means once economic growth is back on a sustainable path to preserve global confidence and keep the dollar strong.
(Additional reporting by Richard Cowan; Editing by Neil Stempleman, Tim Ahmann and Diane Craft)
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