Last Updated Jul 15, 2009 6:10 AM EDT
Due to the economic decline of the last year revenue is falling while spending requirements are going up. To date total revenue collected is down almost twenty-three percent compared to Fiscal 2008. Simultaneously the government is spending money on unemployment, the "Stimulus" and the TARP. All of these programs and spending are related to the recession.
Obviously if there is not a recovery in revenue or a major cut in outlays this kind of spending cannot be maintained. Revenue increases can come from economic activity or tax increases or some kind of combination of both. Obama and the Democratic Congress have proposed a variety of tax increases to pay for new programs but none to really support current Federal spending unless you count the expiration of the Bush tax cuts which will see rates rise to where they were under Clinton. The campaign "promise" not to tax those over $250,000 a year will probably not stand. As New York and other states are finding out relying on the very wealthy to pay the bulk of your taxes as even the Federal system does leads to those people moving or when their income falls revenue does as well.
All of the states are facing the same problems as taxes are down across the board. It is not just income but sales and real estate taxes as well. The collapse of the housing market in some states has seriously affected local and state taxes. Many governments have moved to slash spending while raising taxes and fees to try and balance their budget. Luckily or not the Federal Government is not required to balance their budget and may make up the differences with borrowing. Eventually this may lead to higher interest rates on the debt in order to make it attractive to borrowers. This is not a cycle that will be sustained for ever and unless there is significant improvement in the economy the U.S. is facing long term financial issues.