03.26.2012 in Economy, Featured by Bill Wilson 4

What if the economy grows slower than expected?

Obama Hope PosterBy Bill Wilson — If nothing changes about our current spending trajectory and Barack Obama gets everything he what he wants out of Congress this year in his budget, the national debt will increase $10 trillion over the next decade — to $25.9 trillion by 2022.

What’s alarming about this number is that it could be even higher.

If the Administration’s economic projections of about 3 percent annual growth over this decade — with no recession — turn out to be too rosy, revenues to the federal treasury will not be as high as projected.  As a result, borrowing will be even greater than expected.

For example, the Administration expects revenues to nearly double this decade to about $40.2 trillion.  On the surface, that appears a safe assumption. For much of modern history revenues have doubled every decade like clockwork.

Except in the 2000’s. Then, annual revenues averaged about $2.3 trillion. And there they stand still. In 2011, $2.303 trillion was collected in taxes.

The Obama Administration is expecting an additional $17 trillion of revenue this decade, but where will it come from?  Say, they’re wrong, and they only collect $35 trillion. Suddenly, the deficit grows by another $5.2 trillion.

Add another $858 billion extra interest owed (at say, 3 percent) on that unexpected deficit, and suddenly the national debt is more than $6 trillion larger than anticipated — at $31.9 trillion.

If average interest owed on that additional debt is actually higher than 3 percent — the historical average after all is about 5 percent — then the picture looks that much worse, resulting in hundreds of billions more in debt.

It is in this context one should consider any budget proposal. With the $15.6 trillion debt already larger than the entire economy, are the fiscal options being presented to the American people the best ones? Do they consider the possibility of another economic downturn? Do they take into account the potential for higher interest rates? What if there’s another war?

The budget presented by House Republicans, for example, with lower tax rates than Obama’s, expects revenues of $37 trillion instead of $40 trillion. It also spends about $7 trillion less than Obama, and would result in a gross debt closer to $21.8 trillion by 2022.

In that sense, the House proposal is superior, because should the economy grow slower than expected, there is at least some wiggle room. Whereas, the Obama budget leaves little to no margin for error.

But it must be noted that under the adverse scenario of slower than expected growth, the debt might still rise to $26.4 trillion under the Republican proposal. Worse if interest rates should rise too.

That should give the American people pause as they consider whether any proposal being presented goes nearly far enough to restore order to the nation’s fiscal house.

Given our recent history, it would appear prudent to air on the side of caution, and take promises of robust economic growth curing our debt problems with a grain of salt. Voters will believe it when they see it. In the meantime, we should be considering serious cuts. Hope, after all, is not a strategy.

Bill Wilson is the President of Americans for Limited Government. You can follow Bill on Twitter at @BillWilsonALG.

This article has 4 comments
  • papajair 26.03.2012 3:46 PM

    Good article, Bill and it takes nothing away from the content of the article but I think you meant to write “err” instead of “air on the side of caution,”.

    Keep up the good work.

  • geoffreybramhall 26.03.2012 4:32 PM

    We just have to get the spending under control and let the growth
    in revenue, whatever it is, take care of the deficits.  It is bewildering
    that the Obama administration does not see the danger of the present
    course.  We have three things going against us. Spending is spiralling
    upward, taxes and regulations are stifling the economy, and any increase
    in taxex will not produce more income to the treasury but just the opposite.  
    On top of all that, interest rates cannot be expected to remain this low forever.
    What a mess!

  • Bisley 26.03.2012 4:37 PM

    No one can forecast anything ten years out;  if the truth be told, no one has the foggiest idea what conditions will be next year.  The numbers coming out of Washington are worthless, as they always underestimate cost and overestimate revenue in order to make whatever policy the administration is pushing look possible.

    The only real solution to this problem is to quit borrowing, eliminate at least forty per-cent of government spending, along with the agencies and programs that consume it and most of the laws and regulations it pays to enforce.  This would not only enable government to subsist on incoming revenue, but go a long way toward restoring freedom and prosperity, by preventing government micromanagement of everyone’s life, property and business, until no one can function. 

  • Citizen1vote 30.03.2012 2:34 PM

    It`s just not only obama, congress could stop obama but they won`t, why because they are with him. There are 70 self proclaimed card carrying socialist in our congress and that is fact. The truth be known there are probably more and who know how many communist. Socialist and communist HATE the Constitution and Bill of Rights and they will do anything to destroy both. They must be removed and not ever let back in congress. They are stopping the Constitution and Bill of Rights being the supreme law of the land.

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