03.26.2012 0

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.

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