America’s Fiscal Budget: Red All Over

Americas+Fiscal+Budget%3A+Red+All+Over

Matt Moriarty '16, Editor and Staff Writer

Last issue, The Petroc covered Paul Ryan’s appointment as Speaker of the House of Representatives. Mr. Ryan has made clear his intention to bring an air of fiscal responsibility back to the U.S. government, whose debt continues to grow after the 2007 financial crisis. It is hoped that the country’s budgetary woes will be discussed with more urgency in the coming months. For its part, this paper would like to call attention to how severe the problem really is.

America’s population is aging rapidly, putting a strain on the federal government’s funding of Social Security and Medicare (health care for the over-65s). In 2025, these programs will have 70 million beneficiaries, an increase of 36 million from 2007. While today the programs chew up 10% of GDP, by 2025 it will be 12%, and by 2040 in will be 14%. These primary strains on the system will coincide with a global rise in interest rates from their post-2007 lows, meaning the debt will become increasingly more expensive to service. If the debt is to be kept below its current standing at 74% of GDP, it will require either tax hikes or a cut in spending amounting to 6% of the total budget.

The United States is one of only eight OECD members (an organization of 32 rich countries) to fail to reform its public spending programs. In 2010, President Obama established the Simpson-Bowles Commission, a bipartisan mix of lawmakers and economists charged with advising Congress on how to reduce the debt. Not surprisingly, its proposed mix of spending cuts and tax hikes never became law. In 2011, in an effort to force an agreement, Congress planned a series of cuts to vital programs over the next decade. All talks between Republicans and Democrats have mainly been to avoid these cuts, giving us the political spectacles of the “sequester” and the “government shutdown” of past years.

It is common rhetoric from President Obama and other 2016 Democratic candidates that the federal deficit is declining. This is true, but misleading. The deficit is different from the national debt; it is a measure of how much money is added to the total debt each year, or the annual difference between funds taken in by the treasury and the funds it spends. In real terms, the deficit has been declining from 8% of GDP in 2010 to 2.5% of GDP today, its lowest level since 2007. This decline is a result of the many cuts imposed after the 2011 agreement, as well an improving economy.

The declining deficit is misleading on two counts. For starters, cuts have targeted vital programs like spending on infrastructure, which is badly needed to repair America’s crumbling roads and bridges. Those cuts will not be sustainable in the long term. The second reason Americans should not be comforted by a declining deficit is that it will not last. The Congressional Budget Office predicts that federal borrowing will begin to rise again in the coming years, culminating with a debt of 78% of GDP in as early as 2025. Bear in mind the historic average of American debt is 45%, which is still not considered “healthy.”

Many enemies of austerity have cited the merits of taking on debt, even going as far to say the United States could handle borrowing up to 124% of GDP. Unfortunately, economists know having a government leveraged to the heels in order to pay out its day-to-day expenditures slows private sector growth. A great deal of uncertainty and risk is attached to such extensive federal borrowing, particularly when no long-term plan is in place to pay down the debt. Additionally, when the government borrows, it decreases the amount available for private sector investment and drives up interest rates.

The fiscal health of the county looks even worse when considering the bloated programs of Social Security and Medicare are not even included in the national debt figure. Social Security and Medicare are set up as public trusts (separate from the Treasury’s budget), meaning through payroll taxes the current workforce pays for the entitlements of the older generation. As the ratio between workers and retirees declines, the trusts are going bankrupt. Medicare’s trust will go dry in 2030, and Social Security’s four years after that.

As Mr. Ryan will soon discover, despite the problem being well documented, addressing it is no small political feat. Seniors are the most politically engaged of any age group and they sink any politician who floats the idea of trimming back benefits. Better to raise the retirement age, say Republicans, adjusting it to meet rising life expectancies. Chris Christie, a Republican presidential candidate, wants to “means test” Medicare, meaning that benefits would not be provided to those earning over $200,000 a year. Both of these ideas could help rein in the red, but their implementation is unlikely.

The Democratic approach to entitlement reform is raising revenues, or imposing higher taxes on Americans to allow for existing patterns of spending. Troubling, though, are estimates that democratic-socialist candidate Bernie Sanders’ plan for a “medicare tax” would amount to a fifteen percent rate hike on incomes over 250,000 dollars. Such an extensive tax increase would only be to address one area of federal spending, which is in need of overhaul, not a refreshed tap of tax dollars.

Both parties can agree that entitlements should not be trimmed to the bone. America’s care already ranks low in comparison to other rich countries. What is needed is a way to address the fact that healthcare is more expensive in the United States than any other country in the world. If a plan can be devised to lower costs, it will ease the strain on the federal balance sheet. The Affordable Healthcare Act, the most recent attempt at reform, has failed to do this.

Moreover, the country as a whole must decide what the end goal is of its entitlement programs. If it is just to provide a base level of minimum care to all Americans, then there is room to make cuts. But if the goal is to have federally-subsidized, complete care for all, there is a long way to go before such a system is sustainable. For the moment and the predictable future, the treasury is awash in a sea of red.