Search This Blog

Friday, December 24, 2010

The Growing Deficit - Relevant?

The 2010 Tax Relief Act enacted December 17, 2010 (P.L. 111-312) which extends tax cuts from 2001/2003 and even later, has a projected budget effect of negative $858 billion! (Joint Committee on Taxation, JCX-54-10) And, this is only a two year extension for most of the provisions. That is, the $858 billion over 10 years isn't the cost of these provisions being in effect for each of 10 years, but mostly just for two years.

A tax system is supposed to generate funds for government operations. Given growing deficits and national debt, our tax system is not doing that. Of course, the federal government has been trying to stimulate the economy which can justify some negative spending, but when will it end? The tax cuts enacted in 2001 and 2003 were not for helping to get us out of a recession.

Deficit spending increases borrowing which further increases the deficit due to greater interest expense. At what point is the debt so large that people and other countries are unwilling to loan us money? What happens then?

Maya MacGuineas of the New America Foundation has a paper posted entitled - Creating a Fiscal Turnaround in the United States (12/13/10). It provides a clear explanation of the growing debt levels in relation to GDP and the problems that can ensue from too much national debt. She notes:

"The debt held by the public has averaged less than 40 percent of GDP over the past 50 years in the United States. It now stands at 62 percent, and is projected to reach close to 90 percent by the end of the decade, 100 percent by fiscal 2024, and 200 percent by the mid-2040s."

She also notes that greater debt leads to higher interest rates further increasing expenditures and the debt leading possibly to a recession and lower standards of living.

In my list of trends to linger after 2010, I include "deficit awareness." I think the President's Deficit Commission, talk of the need for a VAT to pay down the debt, and efforts by groups noted in MacGuineas' paper (including the New America Foundation's Committee for a Responsible Federal Budget directed by MacGuineas, and the Peterson Foundation) in raising awareness and developing solutions, are starting to get more attention than in prior years.

While the report did not get the required 14 out of 18 votes to head to Congress, the Deficit Commission has a "final report" with bipartisan support, and is likely to get attention in Congress. Whether action will be taken remains to be seen, but any discussion hopefully will continue to raise awareness by the public. But, I think until most of the public recognizes that this is everyone's problem to solve and that we'll all need to contribute in some way to address it, it will be slow going.

What do you think?

No comments: