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America's Budget Mess May Be Worse Than We Realize

Posted By David Weinberger On July 14, 2011 @ 1:58 pm In Economics | Comments Disabled

[1]

An article in the The Wall Street Journal recently revealed [2] 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 [3] 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 [4]).

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 [5].

According to this alternative fiscal scenario, deficits are projected to remain over $1 trillion through 2021 [6]. Meanwhile, U.S. debt is scheduled to hit 100 percent of GDP [6] 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 [7] 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 [8], our fiscal situation could get even worse. The cost of borrowing is currently low—2.5 percent [2]. However, the average borrowing cost for the past two decades has been 5.7 percent [2]. 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. [2] 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 [2]. Nevertheless, the academic community and our current economic growth rates suggest that rates will be closer to 2.5 or 3 percent. [2] Being off by even one percentage point would cost an additional $750 billion per year. That means another $4 trillion over 10 years [2].

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 [9].” 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 [9] 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.


Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2011/07/14/americas-budget-mess-may-be-worse-than-we-realize/

URLs in this post:

[1] Image: http://www.foundry.org/wp-content/uploads/pennies-coins-money.jpg

[2] recently revealed: http://online.wsj.com/article/SB10001424052702304657804576401883172498352.html

[3] $2.16 trillion in total tax revenue: http://www.cbo.gov/ftpdocs/120xx/doc12039/SummaryforWeb.pdf

[4] and will borrow 43 cents of every dollar this year: http://mercatus.org/publication/how-much-federal-spending-borrowed-every-dollar?UA-2082207-2%22,,0,0,,,,

[5] extended baseline: http://www.heritage.org/research/reports/2010/08/new-cbo-budget-baseline-shows-that-soaring-spending-not-falling-revenues-risks-drowning-america

[6] over $1 trillion through 2021: http://www.heritage.org/Research/Reports/2011/01/New-CBO-Budget-Baseline-Reveals-Permanent-Trillion-Dollar-Deficits

[7] much higher interest payments: http://www.heritage.org/budgetchartbook/charts/2011/budget-net-interest-spending-600.jpg

[8] Lawrence B. Lindsey: http://online.wsj.com/search/term.html?KEYWORDS=LAWRENCE+B.+LINDSEY&bylinesearch=true

[9] Saving the American Dream: http://www.heritage.org/research/reports/2011/05/saving-the-american-dream-the-heritage-plan-to-fix-the-debt-cut-spending-and-restore-prosperity

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