Priorities for Obama's Second Term: #2 Reducing the Federal Deficit

This is the second in a series of posts about priorities for Congress and President Obama in his second term.

Priority #1, The Fiscal Cliff:
http://debatablypolitical.blogspot.com/2012/11/priorities-for-obamas-second-term-1.html
Priority #3, Immigration Reform: 

http://debatablypolitical.blogspot.com/2012/12/priorities-for-obamas-second-term-3.html

Priority #4, Tax Reform

http://debatablypolitical.blogspot.com/2012/12/tax-reform-in-united-states.html

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Priority #2, Reducing the Federal Deficit

The second priority for the new administration and Congress is to operate the Federal government within budgetary constraints.

Paradoxically, what is needed in the second priority is exactly what Congress and the President are trying to avoid in the first priority.  The programmed spending cuts and expiration of the Bush tax cuts would eliminate only about half of the budget deficit.  These measures, if allowed to occur, are expected to push the economy into recession. 

It is a question of choosing when we take bitter medicine.   Forecasts by the Congressional Budget Office (CBO) indicate that GDP will be higher by 2022 if the Fiscal Cliff measures are allowed to go into effect than if we continue current policies.  The following is the concluding paragraph from the CBO’s Update to the Budget and Economic Outlook, 2012 - 2022   (http://www.cbo.gov/publication/43539).

What Is the Budget and Economic Outlook for 2014 to 2022 If Many Current Policies Are Continued?

….

“Real GDP would be higher in the first few years of the projection period than in CBO’s baseline economic forecast, and the unemployment rate would be lower. However, the persistence of large budget deficits and rapidly escalating federal debt would hinder national saving and investment, thus reducing GDP and income relative to the levels that would occur with smaller deficits. In the later part of the projection period, the economy would grow more slowly than in CBO’s baseline, and interest rates would be higher. Ultimately, the policies assumed in the alternative fiscal scenario would lead to a level of federal debt that would be unsustainable from both a budgetary and an economic perspective.”

The current US federal debt held by the public is about $11.5 trillion.  (The larger figure sometimes cited includes debt between government agencies.)  Our 2012 deficit of $1.3 trillion is increasing the federal debt at a rate of 11 percent per year.

The deficit is expected to equal -7.3 percent of GDP for fiscal year 2012. Federal debt held by the public reached 73 percent of GDP at the end of the fiscal year (http://www.cbo.gov/publication/43539).  The Debt-to-GDP ratio is calculated at 103% by the IMF, using a definition of debt that includes intra-government obligations, such as the Social Security Trust Fund.  The IMF estimates that federal debt will reach 115% percent by 2016, one of the highest ratios in the world, and higher than the troubled economies of Ireland, Italy, and Portugal, four of the five PIIGS (Portugal, Ireland, Italy, Greece, Spain), the countries causing the European debt crisis. 

The European debt crisis offers a clear example of the American future if our deficit spending is not contained.  Social unrest, political disorder, and economic inefficiency and turmoil are our clear destination if we continue on the current path. 

The elements necessary to tame America's debt crisis are clear.  The problem requires a combination of increased tax revenue and decreased spending.

Options include:

1)  Increasing individual or corporate tax rates.  The expiration of the Bush tax cuts would provide about $500 billion of increased annual tax revenue.

2)  Decreasing government spending.  Potential targets with large amounts of annual spending might include military spending ($716 billion), Social Security ($779 billion), Income Security (unemployment, childrens’ programs, and welfare, $780 billion), and Medicare ($484 billion).

3)  Reducing or eliminating tax deductions and exemptions.   These are also known as "Tax Expenditures".  There are 73 tax breaks of over $1 billion each, totaling $1170 billion in reduced tax revenue.   Many of these breaks are well-entrenched into our personal finances and culture, but nevertheless represent a significant loss of tax revenue (http://www.washingtonpost.com/wp-srv/special/politics/tax-code-break-by-break/).  This topic will be discussed in greater depth in a future post regarding tax reform.

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http://en.wikipedia.org/wiki/US_public_debt

http://www.washingtonpost.com/wp-srv/special/politics/tax-code-break-by-break/

http://www.cbo.gov/publication/43539

http://debatablypolitical.blogspot.com/2012/10/a-graphical-look-at-united-states-budget.html