Yahoo! Finance is reporting the largest annual federal budget deficit in history. In FY2008, the U.S. government will post a shocking $396 billion budget deficit.

Do we see an end to such budget shortfalls in the future? The U.S. government can’t issue new debt forever. Unless, of course, you think this is a healthy trend:

At some point, these bills will be due, and Americans will be forced to make some very important decisions. We either have to: a) increase taxes to record levels; b) significantly decrease governmental spending; c) devalue the dollar and crowd out private investment with higher interest rates; or, d) pretend the problem doesn’t exist, hide under the covers, and wait for somebody else to fix it. I personally prefer option b. Most politicians seem to like options c and d.

Of course it’s not just a federal problem, but a state problem as well. The Missouri General Assembly will face a $500 million budget shortfall next year as tax receipts continue to decline. This morning’s Post-Dispatch provides a good assessment of where those shortfalls are going to hit hardest:

That $500 million will have to come from the general revenue budget, which makes up only about a third of the overall $22.5 billion state budget. (The rest largely is funded by federal funds passed through to the state and by tax funds limited to specific applications such as highways and conservation.)

So most of the $500 million in cuts would have to come from just four programs: elementary and secondary education, higher education, corrections and human services (Medicaid and mental health).

Well, that’s great, because those just happen to be four areas in which the Show-Me Institute has researched ways in which the state could easily save money.

Personally, I think former Missouri governor Bob Holden says it best in the Post-Dispatch editorial when he summarizes the current fiscal situation.

There’s a solution here, but it’s going to take a level of courage and bipartisanship that hasn’t been seen in Missouri in recent decades. "It’s going to take political leadership," Mr. Holden said. "Instead of demagoguing the problem, they’re going to have to try to solve it."