The federal deficit was $1.42 trillion last year and an additional $1.17 trillion will be added during fiscal 2010, according to the Congressional Budget Office. By the end of 2020, the CBO projects an accumulated deficit of nearly $10 trillion – and it could easily go higher. The numbers are staggering!
Tax increases will be levied on the highest income earning taxpayers, returning the highest marginal tax rate of 39.6 percent, indicative of the Clinton era, according to the CBO. Funding for Medicare, Medicaid and Social Security has jumped by about 13 percent over the 2009 federal budget. The base Department of Defense budget has increased through 2014 by an average of 1.2 percentage points, from $534 billion to $575 billion.
Estimates of revenue are based on optimistic Gross Domestic Product growth that exceeds the CBO’s January forecast through 2010 but is broadly consistent with it from 2011 through 2019.
The budget’s GDP growth assumption is more optimistic than the February Blue Chip consensus forecast through 2014 (by an average of 1.2 percentage points) but again is broadly consistent with the Blue Chip from 2015 through 2019.
What does all this mean? We need to follow the money trail and its impact.
Budget Deficit vs. National Debt
A budget deficit is when you spend more money in a given period (i.e. month) than your income. So what do you do? You borrow (maybe in the form of a credit card) to pay it back. The amount you borrowed is called your debt. But you have to pay interest on your debt. If by next month you can’t cover your spending, you have to borrow more and you still are saddled with the interest on your loan.
If you have a deficit every month, you have no choice but to keep borrowing and your debt accelerates. Eventually, your interest payment on the loan is bigger than any other item on your budget. Over time, all you can do is pay on your interest payment and you may not even be capable of covering that portion. And there’s no money left to pay for any other line items. This situation is known as bankruptcy.
Every year since 1969, Congress has spent more money than its income. The Treasury Department must borrow money to meet
budget appropriations made by Congress. The United States must pay interest on that huge debt, and now the Treasury Department is having trouble finding lenders.
A recent BBC News article – “Foreign demand for U.S. debt drop by record amount” – reported that foreign demand fell by a record amount in December as China reduced its holdings. The Treasury Department said foreign holdings fell by $53 billion, a new record.
China cut its debt holdings by $34.2 billion. This means that Japan is now our biggest debt holder after China. This drop in demand may mean the United States might have to pay more to borrow while servicing a record and growing budget deficit.
China previously questioned whether U.S. T-bills and notes are safe and whether we can sustain our deficits. China now questions the U.S. position as the world reserve currency.
This year our federal budget is nearly $14 trillion and is projected to create a record deficit of over $1.5 trillion, further weakening the value of the dollar. To put this into perspective, our budget deficit is becoming a larger portion (percentage) of our overall budget.
Over the last 75 years, Congress has enacted laws to create more debt to pay for our underfunded entitlement programs such as Social Security, Medicare and the Medicare prescription drug program. These programs now total nearly $108 trillion.
How Long Can We Sustain The Deficit?
We can’t keep raising taxes or print money to pay for our entitlement programs, especially with unemployment stuck around 10 percent. Wall Street really can’t get too aggressive again by creating derivative and hedge fund markets – that’s what the housing bubble was about.
This country needs to create new wealth to get out of this mess. There are only a few areas of opportunity left to accomplish this nearly insurmountable feat. For instance, we need to develop renewable energy industries, leverage our agricultural prowess, and harness our intellectual properties working through our institutions of higher learning.
We live in a world economy. We must work in conjunction with our government and institutions of higher learning to add value to our country if we are to create more wealth relative to the rest of the world. Otherwise, our standard of living will continue to show serious decline.
This post is courtesy of TechMan who writes about trends, issues and ideas affecting business, industry and technology.
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