Wednesday, December 1, 2010

Our Unsustainable Federal Budget Deficit

As most Americans no doubt know, our country has substantial financial problems that require urgent attention. If appropriate action is not taken, the problems will only get worse and become much more difficult to deal with. Virtually all of us will ultimately be materially affected, depending on what happens or doesn't happen.

One of the biggest problems is our unsustainable federal budget deficit, that is the annual fiscal year difference between U. S. government revenues or receipts and spending or outlays. For both years ending September 30th in 2009 and 2010 the federal deficit has ballooned to roughly $1.4 trillion, equivalent to between 10% and 11% of the country's Gross Domestic Product (GDP), the highest rate since the end of World War II. So the government is spending $1.4 trillion more than its receiving in taxes and other receipts and can only do so by borrowing this amount from creditors, including especially in recent years China.

The borrowing adds to our outstanding public debt, which totaled $13.56 trillion or as much as 94% of annual GDP at the end of the last fiscal year. It also adds to huge amount of interest we must pay on this high debt level, budgeted at $164 billion for fiscal 2010! As the debt increases with large annual deficits and interest rates very likely growing significantly in future years, the interest burden will increase dramatically. Obviously this financial situation is unsustainable and moreover it is threatening our prosperity and important role in global affairs.

Recognizing the seriousness of this issue, President Obama appointed an 18 member bipartisan deficit commission in February this year co-chaired by former U. S. senator Alan Simpson, a Republican, and former chief of staff under President Clinton, Erskine Bowles, a Democrat. In a 59 page report the commission has come up with a large number of prudent proposals that reasonably well address the difficult deficit problem and likely become starting points for President Obama's budget plan for FYE 2012 as well as the budget plan to be put together by the Republicans when the new Congress convenes in January.

The full commission is scheduled to vote on the proposals at a meeting tomorrow. If 14 or more members vote favorably on the package, the commission will issue a formal recommendation to Congress and the White House. Even if that doesn't happen, I think the commission has done its job and its proposals will still probably serve as reasonable starting points for the plans of both parties.

The commission's report is based on a plan to reduce the deficit 75% through spending cuts and 25% through revenue (largely tax) increases. Among noteworthy spending cut proposals are freezing pay for federal workers, including members of Congress, for 3 years; cutting congressional and White House budgets by 15%, eliminating all congressional earmarks; and increasing the minimum age for receiving full Social Security benefits over a long timeframe. Revenue increases would come from, among other sources, a 15 cent per gallon gas tax increase (rate is currently 18.4 cents) and reworking the IRS tax code including eliminating itemized deductions and interest deductions on mortgages above $500,000 on individual tax returns, and closing tax loopholes which induce American companies to base operations abroad. Most of these changes are not planned to be implemented until 2012.

How the panel proposed to deal with the huge $453 billion spending on Medicare and $290 billion on Medicaid is rather complicated and not entirely clear, but they have recommended to increase cost sharing for Medicare recipients, reduce payments to physicians for services rendered and to hospitals for medical education services, and focusing more on eliminating Medicare fraud, among a long list. Importantly, the panel seems unanimous in not wanting to adversely impact the very poor in our population in their recommendations.

I generally have no problem with the above proposals, given what's at stake, except that we shouldn't necessarily wait to implement every proposal until 2012, such as beginning to cut Defense expenditures by closing down unnecessary or marginally needed overseas military bases. Other reactions:

1. With 70% of aid going to the largest 10% of agribusinesses, why not finally eliminate all farm subsidies, which can save us $25 billion annually, rather than just a fraction of this aid?

2. The current tax deduction for interest on mortgages apparently costs the federal government $130 billion annually. Retaining the deduction for homeowners whose mortgages are under $500,000, but eliminating it for those who have a larger mortgage makes sense. I'd also be open to a tiered structure where the elimination partially begins at say $300,000 and gradually increases to the $500,000 level. Hopefully any of the realistic options could save us close to $100 billion each year.

3. How about increasing the federal tax on cigarette sales, currently $1.01 per pack, and other tobacco products? It might not have a significant impact on current federal revenues, but it may induce fewer people to smoke, especially teenagers, and thereby reduce future federal spending on health care through Medicare and Medicaid.

4. We should consider reasonable means testing for Social Security recipients, so that those who earn more than, say, $250,000 in current dollars, who do not really need this income, do not receive any Social Security, or perhaps no more than 50% of what they would have been eligible for.

5. Noting that the panel is recommending 15% cuts in the budgets of Congress and the White House, why not the same cuts for all the federal departments and agencies, or are these included already in the White House budget?

We won't know exactly how all this will turn out for at least several months, and it could be years, but I'm cautiously optimistic that the government is finally on the right track toward a more viable and balanced budget. Hopefully, Speaker-elect John Boehner and President Obama and their staffs can work together to get this achieved on a basis that can be approved by Congress and judged fair and satisfactory by the majority of the American people. However, unfortunately there is a real possibility that stubborn and ill-advised partisanship pushed by the more radical groups on both the left and the right will jeopardize and delay a prudent outcome.

1 comment:

Viking Views said...

I agree with President Obama that the Republicans in Congress unreasonably held him and the Democrats hostage by insisting on extending the Bush tax rate cuts for those households earning more than $250,000, and subsequently in negotiations even to those earning more than $1.0 million, as the price for their cooperation on extending the tax cuts to the middle and lower income classes and several other measures. As I recall, the two year extension on the higher income people would cost an estimated $136 billion plus interest which would be added to the federal budget deficit and our public debt.

It does seem hypocritical, given the Republicans' strong concern with reducing spending, the deficit and our debt level. The argument made that not extending these tax cuts for the rich would harm the economy and prospects for small business owners hiring more workers was not very compelling. How many of these rich are small business owners, in fact, and for those that are, would they decide not to hire workers due to a 3% higher income tax rate, if other market conditions and revenue growth prospects for their businesses were attractive? I submit the answers are "not a majority" to the first and "no" to the second. I also am of the view that with the extension for the rich that now looks like it will go ahead, we will see that the rich will not materially increase spending with their slightly higher than otherwise disposable income to boost our economy. Rather, unlike most of the middle class, they will most likely increase their savings and portfolio investments in stocks and bonds.