A review of the Congressional Budget Office forecast of the 2010 to 2020 fiscal P&L and balance sheets for the US government leaves the impression that the government is caught in a financial vice from which it cannot free itself—at least not in the next ten years.
Every newspaper, newscast, and online information site gave front page billing to the CBO report that the 2010 federal budget deficit will be $1.35 trillion, assuming current laws and policies remain unchanged. ‘The agency worried in its report that if Congress does not cut spending or raise revenue via taxes that the numbers could be even worse than they were in 2009 when the deficit was $1.4 trillion. The part of the analysis that should startle people the most is the CBO assumption that unemployment will remain above 10% for at least the first half of next year. This information must have caused everyone in The White House to blanch. The Administration has pushed the idea that its stimulus package would rescue the U.S. from severe joblessness early this year.
The CBO was not as optimistic about the economic recovery as many politicians and economists are. The agency expects GDP growth between the fourth quarter of last year and the last quarter of this will only be 2.1%.
The reasons for the deficits in 2010 and beyond are old-fashioned ones. Outlays rise from $3.15 trillion in 2009 to $3.94 trillion in 2014. Revenue moves up much more modestly, and reaches $3.46 trillion in 2014. And, that is if the pace of the economy goes moderately well. The effect that accompanies this is that national debt held by the public goes from $7.5 trillion in 2009 to $15 trillion in 2020.
The authors of the CBO report do not give any advice on how to cut the deficits of the next decade, but they do give the reader some hints. The report puts together two different cases for the withdrawal of troops from Iraq and Afghanistan. The effect on the deficit in the case of a rapid cut in troop strength is $1.8 trillion during the 2011-2020 time-frame. A freeze in discretionary spending and changes in the tax rate are also suggested avenues to decrease the huge deficits.
The CBO report is full of analysis of the value of the dollar, trade figures, inflation, and inventories. The reality of the choices which face taxpayers and the federal government get easier as each year passes in the 2010-2020 forecasts. The mandatory outlays in the budget rise 55% over the period. Social Security costs go up by 67%, Medicare rises by 96%, and Medicaid by 64%. The only very large outlay that grows modestly is the Defense budget, which only rises 17%.
President Obama has suggested a freeze on the part of the budget which is considered discretionary spending for the period from this year until 2013. That, The White House estimates will cut the deficit by $250 billion over the next ten years. A number of opponents of the Administration and economists consider the proposal nothing more than the most modest of gestures.
The hard truth about driving the deficit down is the same now as it has been at any point in the last quarter of a century when deficits were high. Taxes can bring in more money, but are hard to levy during a soft economic period without throttling the recovery. Stimulus programs may work over time, but their upfront costs are considerable and add quickly to the government’s debt burden, perhaps so quickly that they offer no reasonable financial return.
The reality of the probable failure of higher taxes to shrink deficits leave only cuts in the nation’s large social safety network and its war machine as sources of funds. No one wants to take on the project of telling the old and those in need of help that it is not realistic for the nation to give these services at the same level any more. Like the people who lost their fortunes in the market crash or to swindlers like Madoff, the country’s needy will almost certainly have to learn to live with less.
S&P recently told the Japanese government that it would put the nation’s sovereign debt on its negative credit watch list. Japan’s bonds may be downgraded to “AA”. The action would not only be humiliating to the government of the world’s second largest nation by GDP; it would drive up the costs for Japan to borrow money to fund its deficit. S&P reasoned that Japan’s economic growth is too slow, its government spending is too high, and its aging population will cause the nation to have fewer productive people who can be readily taxed. The US might be described the same way.
The American social services that have become part of the fabric of what the federal government provides its citizens may remain a part of that fabric, but the services come at too high a price. The nation can cut them judiciously now or be forced to make deeper cuts and perhaps haphazard cuts when the question of the US government’s ability to raise money is on the line.
Douglas A. McIntyre