The Congressional Budget Office (CBO)’s forecast of federal deficit of $506 billion—simply put, spending would exceed revenue by this much—during the current fiscal ending September sounds positive in the shirt team and hugely negative in the long term. First the good news: though a slight rise from April forecast of a deficit of $492 billion, due to a fall in income from corporate tax, this is clearly less than the $680 billion deficit reported during the previous fiscal. This would also be the fifth consecutive year the deficit has fallen as a share of GDP from 9.8 percent in 2009 to an expected 2.9 percent during the current fiscal.
The murkier picture lying deep beneath the seemingly balanced short-term prediction is this: CBO expects the accumulated federal debt held by the public to reach 74 percent of GDP by the end of this year—the highest debt to GDP ratio since 1950—and 77.2 percent by 2024.
Why should the federal government stop being complacent and start worrying deeply about something that is expected to happen 10 years from now? There are ample reasons. First, debt reaching 77.2 percent of GDP is within a stone’s throw of 90 percent that is seen by a growing group of economists as the danger mark crossing which would push the economy to a realm where a complete collapse would be a constant reality. Beyond this cut-off point, economists warn, inflation will shoot up, interest rates will spiral and private investment will crowd out, severely hurting all Americans, especially the middle class, the elderly and the have-nots.
Spiraling cumulative federal debt would also escalate the chances of a sudden fiscal crisis, dampening investors’ confidence in the government’s ability to manage its finances. At this point, the government will begin to lose ability to borrow at affordable rates to meet expenses, getting trapped in a vicious circle. Debt at stratospheric levels will pull down growth steeply and severely hamper the federal government’s capability to respond to out-of the-blue challenges, possibly precipitating a debt-driven financial mess.
Having already hit the debt ceiling and revised it with great difficulty—three years ago, after an acrimonious debate, President Barack Obama and Congress decided to lift debt ceiling by $2.1 trillion to $16.39 trillion from $14.29 trillion in exchange for a series of spending cuts spread over 10 years, forcing S&P to cut the country’s glossy AAA credit rating—the government does not have too many options at hand. It is staring at the double whammy of already bloated debt and expenditure and an even greater climb in future debt and costs. To rub salt to the wound, spending in Social Security and Medicare is expected to mount further. Besides, surging interest on existing and expected debt will gulp possible returns from tax collection.
This may seem an unlikely comparison but learning a lesson or two from the travails suffered by some of the European countries whose debt crossed 90 percent of GDP—in 2011, Greece touched a debt-to-GDP ratio of 165 percent; Italy 100 percent and Portugal 97 percent—would help. The combination of bailout and fiscal austerity cobbled up by European lawmakers couldn’t restore investors’ lost confidence in Greece’s ability to manage its debt. Is drawing a parallel with European economic weaklings such as Greece realistic? Well, predictions of the 2008 financial crisis were denounced as unrealistic when they were made years before the deep slump.
So what should the federal government do? Mounting obligations to retain the seemingly unsustainable entitlement programs and spiraling expenditure are two ghosts that should be fought immediately. Reforming entitlements and deeply cutting spending could be the humble but earnest first step. Then the President and the Congress should initiate harsh but realistic steps to balance the federal budget over the long term, say a 10-year period.
The murkier picture lying deep beneath the seemingly balanced short-term prediction is this: CBO expects the accumulated federal debt held by the public to reach 74 percent of GDP by the end of this year—the highest debt to GDP ratio since 1950—and 77.2 percent by 2024.
Why should the federal government stop being complacent and start worrying deeply about something that is expected to happen 10 years from now? There are ample reasons. First, debt reaching 77.2 percent of GDP is within a stone’s throw of 90 percent that is seen by a growing group of economists as the danger mark crossing which would push the economy to a realm where a complete collapse would be a constant reality. Beyond this cut-off point, economists warn, inflation will shoot up, interest rates will spiral and private investment will crowd out, severely hurting all Americans, especially the middle class, the elderly and the have-nots.
Spiraling cumulative federal debt would also escalate the chances of a sudden fiscal crisis, dampening investors’ confidence in the government’s ability to manage its finances. At this point, the government will begin to lose ability to borrow at affordable rates to meet expenses, getting trapped in a vicious circle. Debt at stratospheric levels will pull down growth steeply and severely hamper the federal government’s capability to respond to out-of the-blue challenges, possibly precipitating a debt-driven financial mess.
Having already hit the debt ceiling and revised it with great difficulty—three years ago, after an acrimonious debate, President Barack Obama and Congress decided to lift debt ceiling by $2.1 trillion to $16.39 trillion from $14.29 trillion in exchange for a series of spending cuts spread over 10 years, forcing S&P to cut the country’s glossy AAA credit rating—the government does not have too many options at hand. It is staring at the double whammy of already bloated debt and expenditure and an even greater climb in future debt and costs. To rub salt to the wound, spending in Social Security and Medicare is expected to mount further. Besides, surging interest on existing and expected debt will gulp possible returns from tax collection.
This may seem an unlikely comparison but learning a lesson or two from the travails suffered by some of the European countries whose debt crossed 90 percent of GDP—in 2011, Greece touched a debt-to-GDP ratio of 165 percent; Italy 100 percent and Portugal 97 percent—would help. The combination of bailout and fiscal austerity cobbled up by European lawmakers couldn’t restore investors’ lost confidence in Greece’s ability to manage its debt. Is drawing a parallel with European economic weaklings such as Greece realistic? Well, predictions of the 2008 financial crisis were denounced as unrealistic when they were made years before the deep slump.
So what should the federal government do? Mounting obligations to retain the seemingly unsustainable entitlement programs and spiraling expenditure are two ghosts that should be fought immediately. Reforming entitlements and deeply cutting spending could be the humble but earnest first step. Then the President and the Congress should initiate harsh but realistic steps to balance the federal budget over the long term, say a 10-year period.
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