• The Heritage Network
    • Resize:
    • A
    • A
    • A
  • Donate
  • America's Budget Mess May Be Worse Than We Realize

    An article in the The Wall Street Journal recently revealed that our budget situation is likely worse than what the Congressional Budget Office (CBO) projects, meaning we could be in much more debt than we realize.

    In 2010, the federal government collected about $2.16 trillion in total tax revenue yet still generated a deficit of nearly $1.3 trillion. This means Washington borrowed about 40 cents of every dollar it spent (and will borrow 43 cents of every dollar this year).

    CBO produces two scenarios to project America’s budget outlook: an “original baseline projection” and an “alternative fiscal scenario.” Both are based on differing assumptions, but the alternative fiscal scenario corrects unrealistic assumptions that CBO is instructed to include in its extended baseline.

    According to this alternative fiscal scenario, deficits are projected to remain over $1 trillion through 2021. Meanwhile, U.S. debt is scheduled to hit 100 percent of GDP by that time. This is economically unstable, especially since deficits and debt will continue to soar thereafter. Interest rates would likely rise, which means much higher interest payments and higher taxes on all of us in order to fund those payments.

    But that’s not all. According to former Federal Reserve governor Lawrence B. Lindsey, our fiscal situation could get even worse. The cost of borrowing is currently low—2.5 percent. However, the average borrowing cost for the past two decades has been 5.7 percent. That means that if borrowing costs rise back to their average levels again, that will add another $4.9 trillion to our interest payments on the debt over the next 10 years. That would all be in addition to the debt mentioned above that we’re already projected to accumulate.

    To add to that nugget of harsh reality, President Obama’s economic projections assume growth rates of 4 percent or higher for the next few years. Nevertheless, the academic community and our current economic growth rates suggest that rates will be closer to 2.5 or 3 percent. Being off by even one percentage point would cost an additional $750 billion per year. That means another $4 trillion over 10 years.

    In sum, if borrowing costs return to their norm and economic growth rates remain low—both of which are likely—then the U.S. will amass more trillions of dollars of debt on top of current projections.

    If America stays on course, it risks higher interest rates, higher tax rates, and weaker economic growth.

    Policymakers can reverse course. They can start by reforming our three entitlement programs, following prescriptions in “Saving the American Dream.” Furthermore, they can chop discretionary spending and reform the tax system to promote healthy economic growth. Heritage economists Bill Beach, Alison Fraser, and Stuart Butler make clear that

    the U.S. government has gone well beyond its proper functions. It has been living beyond the means of the American people, and Congress after Congress has made unwise and unaffordable promises. Americans must return to the basic truths and values of our vision of limited government and reshape our federal government accordingly.

    Our fiscal future is ultimately up to us.

    Posted in Economics [slideshow_deploy]

    6 Responses to America's Budget Mess May Be Worse Than We Realize

    1. George Colgrove, VA says:

      Don't forget about returning defense spending back to 2001 levels. We need to cut everything.

    2. Redfray says:

      The American humanistic understanding is split to a point of no return. Competitism between political differences has lead us to a place of hatred toward the one area of honest ethics.
      The cognitive beginning of America is breached by forgetfullness of our ancestral roots of joining together for a common cause. The common cause has been converted to "me", over "we", and now competition of winning is greater than cohesion of an honest society. Cohesion needs a common nucleus to follow, but that once nucleus is divided by differences of the root of all evil. Propaganda has lead the Americans to bind the meaning of cohesion for the destrution of its freedom.

    3. Stirling says:

      George Soros would be proud of this administration. It took 200 + years for America to build itself up to a becon of freedom and prosperity, and less then 4 years to dismantle it. "A managed decline of the US dollar.." looks more like a crash and burn financially under the current regeim..

    4. Herein lies the box we are painting ourselves into. At some point in this process a return to healthy economic growth will itself become a danger as it forces a return to the normal cost of borrowing and beyond our ability to afford. This will require a hellish inflation as the only remaining solution.

    5. Pingback: Investing in Liberty: An Interview with Congresswoman Ileana Ros-Lehtinen

    6. pat kozakis says:

      doesn't murdoch own and run the wall street journal- this brings everything into question

    Comments are subject to approval and moderation. We remind everyone that The Heritage Foundation promotes a civil society where ideas and debate flourish. Please be respectful of each other and the subjects of any criticism. While we may not always agree on policy, we should all agree that being appropriately informed is everyone's intention visiting this site. Profanity, lewdness, personal attacks, and other forms of incivility will not be tolerated. Please keep your thoughts brief and avoid ALL CAPS. While we respect your first amendment rights, we are obligated to our readers to maintain these standards. Thanks for joining the conversation.

    Big Government Is NOT the Answer

    Your tax dollars are being spent on programs that we really don't need.

    I Agree I Disagree ×

    Get Heritage In Your Inbox — FREE!

    Heritage Foundation e-mails keep you updated on the ongoing policy battles in Washington and around the country.

    ×