http://business.timesonline.co.uk/article/0,,8210-1259404,00.html
IN AMERICA, the sound of political battle grows steadily louder. With less than two months left on the countdown to polling day in this tightest of presidential election races, the candidates are turning up the campaign volume towards maximum. But of one of the biggest of the central issues confronting the US, little is heard. The silence over America’s ballooning budget deficit is deafening.
Washington’s seemingly inexorable slide ever deeper into the red was made all too plain only last week when Capitol Hill’s non-party Congressional Budget Office unveiled its latest projections for US government borrowing. The scale of the numbers is dizzying: this year’s deficit is on course to reach a cash record of $422 billion (£234 billion), according to the Congressional Budget Office — more than 4 per cent of America’s annual national income. And from 2005 until the end of 2014, the CBO forecasts cumulative extra borrowing of almost $23 trillion.
Yet this 14-figure symptom of fiscal stress in the world’s biggest economy scarcely registers in the contest for the White House. Despite its profound implications, it hardly resonates with the US electorate. Just 2 per cent of Americans mention it as one of the important problems facing their country.
And what does not count with the voters is discounted by the candidates, whose attention to how they might tackle the deficit is best described as desultory. Discussion is drowned out by the concentration of debate on Iraq and the War On Terror. It is one of the ironies of this election’s emphasis on US national security, that this comes at the expense of attention to economic security, even though America’s strength rests so heavily on its financial muscle.
The speed, as much as the scale, of turnaround in the US fiscal position is startling. Between 1998 and 2001, the federal Government was in the black. In only four years, it has moved from a surplus of 2.4 per cent of GDP to a deficit of 4.2 per cent — a swing of 6.5 per cent of national income.
This short road to fiscal purgatory has been paved with rosy projections. At the end of the Clinton Administration, the impartial CBO was forecasting surpluses stretching far into the future. But these were fantasy forecasts, based on unreal assumptions that federal spending would remain static even as the economy grew.
In 2001, the CBO’s number-crunchers finally changed their methods to include the expectation that spending would rise in line with inflation. Then, the projections still showed a cumulative surplus over the next decade of $5.6 trillion. But a fiscally toxic combination of the 9/11 attacks on New York and Washington, the subsequent wars in Afghanistan and Iraq, the blow to revenues from Wall Street’s bear market, and a combination of steep spending increases and substantial tax cuts has seen this evaporate.
There is little doubt that the aggressive tax cuts pushed through by President Bush helped to bolster activity and make the recent US recession both short-lived and shallow. But the big worry is that much of the deterioration in the deficit appears to be structural or discretionary, rather than merely a cyclical phenomenon which will disappear as the economy accelerates.
Even now, and despite its 14-figure forecast for the ten-year deficit, the CBO’s projections remain as hopelessly optimistic as they are unrealistic. On its latest assessment, the deficit should decline from $422 billion this year, to about $300 billion by the end of the decade, and then to a manageable $65 billion by 2014.
Unfortunately, the CBO’s sums recall the branches of arithmetic as defined by the Mock Turtle in Alice in Wonderland: “ambition, distraction, uglification and derision”. The figures remain based on implausible requirements imposed on the forecasters by US law.
To reach a more accurate view it is necessary to adjust the numbers to reflect the likelihood that the Bush tax cuts will be extended by a Republican Congress whoever wins in November.
A more plausible forecast would also show spending rising sharply, rather than in line with inflation. In recent years, US federal spending has climbed by an average of more than 7 per cent a year. And both the President and his Democratic challenger, Senator John Kerry, have made campaign promises likely to reinforce this trend.
Together, independent analysts think that these factors could add $5 trillion or more to the cumulative ten-year deficit.
Optimists might argue that, drastic though all this seems, America has been here before and escaped with impunity. The present level of the deficit, at 4.2 per cent of GDP, is far below the 6 per cent reached under Ronald Reagan, which was later unwound into surpluses.
But while Reagan, with typical nonchalance, brushed aside his fiscal problems, saying that “the deficit is big enough to take care of itself”, the truth is that he actually imposed some tough cuts in spending, raised taxes, and supported both a rise in the retirement age and reforms to congressional budget rules requiring spending increases and tax reductions to be financed by offsetting changes elsewhere.
In contrast, both President Bush and Senator Kerry claim that they will halve the deficit over four years, but neither has laid out a coherent strategy for achieving this goal.
All of this matters more than ever because the long-term pressures on the US budget are set to intensify sharply as the 70-million-strong baby-boom generation starts to reach retirement age in the next few years. A widely noted study for the conservative American Enterprise institute by two leading US officials, Jagdeesh Gokhale and Kent Smetters, found that the funding gap between future US tax revenues and spending commitments amounts to $44 trillion.
With much of this liability in the latter half of the century, this incomprehensible number exaggerates the imminent scale of the dangers.
But there is little question that demographic strains will compound America’s financial predicament in the medium term.
Without action, the US can no doubt muddle along in the fiscal mire for a time, relying on foreigners’ willingness to purchase dollar assets to fund the current account deficit which is the counterpart of its domestic indebtedness. But some sort of reckoning is inevitable.
IN AMERICA, the sound of political battle grows steadily louder. With less than two months left on the countdown to polling day in this tightest of presidential election races, the candidates are turning up the campaign volume towards maximum. But of one of the biggest of the central issues confronting the US, little is heard. The silence over America’s ballooning budget deficit is deafening.
Washington’s seemingly inexorable slide ever deeper into the red was made all too plain only last week when Capitol Hill’s non-party Congressional Budget Office unveiled its latest projections for US government borrowing. The scale of the numbers is dizzying: this year’s deficit is on course to reach a cash record of $422 billion (£234 billion), according to the Congressional Budget Office — more than 4 per cent of America’s annual national income. And from 2005 until the end of 2014, the CBO forecasts cumulative extra borrowing of almost $23 trillion.
Yet this 14-figure symptom of fiscal stress in the world’s biggest economy scarcely registers in the contest for the White House. Despite its profound implications, it hardly resonates with the US electorate. Just 2 per cent of Americans mention it as one of the important problems facing their country.
And what does not count with the voters is discounted by the candidates, whose attention to how they might tackle the deficit is best described as desultory. Discussion is drowned out by the concentration of debate on Iraq and the War On Terror. It is one of the ironies of this election’s emphasis on US national security, that this comes at the expense of attention to economic security, even though America’s strength rests so heavily on its financial muscle.
The speed, as much as the scale, of turnaround in the US fiscal position is startling. Between 1998 and 2001, the federal Government was in the black. In only four years, it has moved from a surplus of 2.4 per cent of GDP to a deficit of 4.2 per cent — a swing of 6.5 per cent of national income.
This short road to fiscal purgatory has been paved with rosy projections. At the end of the Clinton Administration, the impartial CBO was forecasting surpluses stretching far into the future. But these were fantasy forecasts, based on unreal assumptions that federal spending would remain static even as the economy grew.
In 2001, the CBO’s number-crunchers finally changed their methods to include the expectation that spending would rise in line with inflation. Then, the projections still showed a cumulative surplus over the next decade of $5.6 trillion. But a fiscally toxic combination of the 9/11 attacks on New York and Washington, the subsequent wars in Afghanistan and Iraq, the blow to revenues from Wall Street’s bear market, and a combination of steep spending increases and substantial tax cuts has seen this evaporate.
There is little doubt that the aggressive tax cuts pushed through by President Bush helped to bolster activity and make the recent US recession both short-lived and shallow. But the big worry is that much of the deterioration in the deficit appears to be structural or discretionary, rather than merely a cyclical phenomenon which will disappear as the economy accelerates.
Even now, and despite its 14-figure forecast for the ten-year deficit, the CBO’s projections remain as hopelessly optimistic as they are unrealistic. On its latest assessment, the deficit should decline from $422 billion this year, to about $300 billion by the end of the decade, and then to a manageable $65 billion by 2014.
Unfortunately, the CBO’s sums recall the branches of arithmetic as defined by the Mock Turtle in Alice in Wonderland: “ambition, distraction, uglification and derision”. The figures remain based on implausible requirements imposed on the forecasters by US law.
To reach a more accurate view it is necessary to adjust the numbers to reflect the likelihood that the Bush tax cuts will be extended by a Republican Congress whoever wins in November.
A more plausible forecast would also show spending rising sharply, rather than in line with inflation. In recent years, US federal spending has climbed by an average of more than 7 per cent a year. And both the President and his Democratic challenger, Senator John Kerry, have made campaign promises likely to reinforce this trend.
Together, independent analysts think that these factors could add $5 trillion or more to the cumulative ten-year deficit.
Optimists might argue that, drastic though all this seems, America has been here before and escaped with impunity. The present level of the deficit, at 4.2 per cent of GDP, is far below the 6 per cent reached under Ronald Reagan, which was later unwound into surpluses.
But while Reagan, with typical nonchalance, brushed aside his fiscal problems, saying that “the deficit is big enough to take care of itself”, the truth is that he actually imposed some tough cuts in spending, raised taxes, and supported both a rise in the retirement age and reforms to congressional budget rules requiring spending increases and tax reductions to be financed by offsetting changes elsewhere.
In contrast, both President Bush and Senator Kerry claim that they will halve the deficit over four years, but neither has laid out a coherent strategy for achieving this goal.
All of this matters more than ever because the long-term pressures on the US budget are set to intensify sharply as the 70-million-strong baby-boom generation starts to reach retirement age in the next few years. A widely noted study for the conservative American Enterprise institute by two leading US officials, Jagdeesh Gokhale and Kent Smetters, found that the funding gap between future US tax revenues and spending commitments amounts to $44 trillion.
With much of this liability in the latter half of the century, this incomprehensible number exaggerates the imminent scale of the dangers.
But there is little question that demographic strains will compound America’s financial predicament in the medium term.
Without action, the US can no doubt muddle along in the fiscal mire for a time, relying on foreigners’ willingness to purchase dollar assets to fund the current account deficit which is the counterpart of its domestic indebtedness. But some sort of reckoning is inevitable.
