By Bill Wilson -
On January 26th, the Congressional Budget Office (CBO) announced that the budget deficit would top $1.5 trillion in 2011, the highest ever on record. That is mostly because of the unpaid-for $56 billion extension of unemployment benefits and a $120 billion cut in payroll taxes on employees from December’s tax deal.
Because there were no offsetting spending cuts for these items, the deal as enacted will now dig the nation deeper into an already unsustainable pit of debt. For comparison, the deficit in 2010 was $1.3 trillion.
At the time of the deal, Moody’s had warned the U.S. that it would increase the likelihood of a negative outlook on the nation’s Triple-A credit rating. Now, the sovereign credit rating agency is keeping to its word.
In a January 27th report, Moody’s wrote, “Although no rating action is contemplated at this time, the time frame for possible future actions appears to be shortening, and the probability of assigning a negative outlook in the coming two years is rising.” A negative rating would in turn increase the likelihood that the Triple-A rating would be downgraded.
To be fair, policymakers had a choice to make. Either allow taxes to rise across the board on all Americans, or keep rates where they were. That was the overarching issue. It so happened that the unemployment benefits extension and underfunding of Social Security were included in the latter option.
Because of the risks to the economy, Congress made a conscious policy decision not to raise taxes. That’s the world we now live in. But it means that the only way to reduce the deficit will be through spending cuts.
And time is growing short to do so. Moody’s has previously warned that when interest owed reaches 18 to 20 percent of revenue, the nation would be in line for a downgrade. By 2018, the CBO reports that the U.S. will reach that level if Obama’s ten-year budget is enacted.
That would mean higher borrowing costs, making it far more expensive for the U.S. to refinance its massive $14 trillion debt. Right now, those payments net $197 billion every year, but just fast forward ten years and the situation looks far worse. In 2020, the CBO baseline estimates that net interest owed on the debt will total about $751 billion yearly.
To put that into perspective, in 2020, every man, woman, and child in America would owe $2442 — just for interest on the debt. By then, of course, the debt will total over $25 trillion, according to the Office of Management and Budget. That’s $80,645 of debt for every American. How will that ever be paid back?
Unless something is done soon, it never will be.
It is now up to House Republicans to put serious spending cuts on the table. Barack Obama is merely proposing a discretionary spending freeze, which will institutionalize spending at its record-high levels and do nothing to decrease the deficit. This is a pathetic proposal that merits no serious consideration.
Meanwhile, Representatives Jim Jordan and Scott Garrett and Senator Jim DeMint have proposed $173 billion of discretionary spending cuts over the next two years, $16.1 billion in cuts to Medicaid, end the ‘stimulus’ saving $45 billion, and ending government ownership of Fannie Mae and Freddie Mac, saving another $30 billion. These cuts represent a good start, and could be attached to a continuing resolution due to expire on March 4th. But more must be done.
Congress also needs to put so-called “mandatory” spending on the table for immediate consideration. This spending is on autopilot, and if Congress does not act, will continue to increase year on end from $2.1 trillion today to $3.3 trillion in 2020, according to the CBO.
As much as $460 billion of cuts could be attached to an upcoming vote to increase the national debt ceiling above $14.294 trillion. Combined with the Garrett-Jordan-DeMint proposal, the savings would total $725 billion, almost cutting the deficit in half.
If coupled with a flattening of the tax code with the elimination of double-taxation, tax credits and exemptions, along with significantly bringing down overall rates, a massive economic expansion would take place. The increased revenues would cover the rest of the $775 billion deficit.
A fiscal reckoning is coming, and once again, policymakers have a choice to make: To take care of it now while it is still manageable or to wait hoping that it will magically go away. The choice seems obvious.
Bill Wilson is the President of Americans for Limited Government.