Last week, the U.S. got news of an impending national disaster, a situation that could have “serious negative consequences for the budget and the nation.”
The warning came from the Congressional Budget Office, a rare, nonpartisan federal agency. Almost nobody paid attention.
The threat comes from ever-increasing deficits and an exploding national debt. It is not a bill that will be paid by our grandchildren, as is often said, but one that we will have to begin paying soon.
The national debt will soon be the same size as the value of the country’s entire annual economy.
While the U.S. usually runs deficits, two recent congressional actions have taken the unbalanced budget to a whole new level.
First came the tax cut bill. New breaks were added to the tax code, mainly to benefit the wealthy and corporations. In theory, they would use their added funds to invest. Everybody knew the argument was flimsy that such investment would spur new tax revenues.
The CBO says that effect will last about a year, then melt. The tax cut will never pay for itself.
Without cutting spending, the result is a growing deficit each year.
While revenues were cut, spending was not touched. Then came the spending bill. Congress decided to spend more on almost all government programs.
For the Republicans to gain votes they needed for their expanded defense spending, they agreed to let the Democrats have more funding for their favorite programs. Previously agreed spending caps, applying to both sides, became historic relics.
The Republicans traditionally charged the Democrats with seeking a “tax and spend” economy. The Dems would add more government programs and propose raising taxes to pay for them. Nobody likes higher taxes, so the GOP would be “deficit hawks” and oppose them.
When President Obama proposed more economic stimulus spending, the Republicans opposed it because of increased deficits. Now, the deficit hawks have flown away, though they could reappear just as soon as there’s a Democratic president.
What’s more, technology will reduce payrolls. The economy will take a break from its continuous growth. The effect will be even less tax revenues.
How does the U.S. pay for the growing annual deficit? It borrows the money. It can borrow because the U.S. dollar is the world’s standard, based on the belief that the country always pays its debts.
Spending on “mandatory” programs like Social Security and Medicare now accounts for 62 percent of all outlays. “Discretionary” programs take 30 percent with half of that going to defense. The fastest growing portion is interest on the national debt, now amounting to 8 percent.
Because the size of the debt will soon come to equal all national output, the CBO warns of a “fiscal crisis,” a situation in which the government can’t pay its bills. The effect of this crisis would quickly spread across the entire economy.
Annual shortfalls in the federal budget must be cut to keep the national debt from bringing on this crisis. How can the yearly deficit be reduced?
The government could cut spending. Departing House Speaker Paul Ryan targeted major programs like Social Security and Medicare. Social Security could be made financially healthier without affecting benefits for those who need them. But it’s not realistic to propose across-the-board cuts.
Could we keep borrowing? Debt service costs less than paying the full price. But the CBO says more borrowing will suck money out of the economy, raising interest rates for both the government and the people. That leaves less money for saving and an even bigger federal debt.
The government could simply print more money, almost magically giving itself the ability to pay off its debt. But that would devalue everybody’s dollar, making what people and the government buys more expensive. That amounts to a hidden tax. It would also reduce the world’s confidence in the dollar as the standard currency.
Finally, the government could raise taxes, using the philosophy “there’s no free lunch.” If the people need or want government programs, they should pay for them and not try to pass the cost on to later generations. And it’s not possible to pay only for programs you like.
The alarming CBO report warns that we can no longer pile on the debt and expect future taxpayers to cover the deficit. We must recognize that refusing to increase taxes as spending grows is beginning to fail.
As the report shows, the future is now and the next ten years will only be worse.
The real bottom line? A tax increase becomes inevitable.