September 17th, 2011
Econintersect: The Congressional Budget Office threw their two cents into the debate of options open to the USA Government to get its budget under control. Citing the aging boomers and the rising health care burdens, budget policy of the last 40 years must be abandoned - and at least one of the following options need to be implemented:
- Raise federal revenues significantly above their average share of GDP;
- Make major changes to the sorts of benefits provided for Americans when they become older; or
- Substantially reduce the role of the rest of the federal government relative to the size of the economy.
The dilemma is obvious from the following graph.
Even under the baseline scenario (which means all laws expire without replacement), the budget deficit remains between 1% and 2% beginning in 2011. If existing laws are extended, the deficit on average will remain above 4% of GDP - and this is not considering another crisis (say another recession, disaster or war).
Further, most are missing that in 2011 the Federal Government is adding an 8.5% tailwind to the economy in 2011 which will be reduced to under 2% by 2014 under the CBO baseline. This likely equates to a 6% headwind to GDP.
Political rhetoric ignores economic realities - taxing removes money from the economy, cutting government spending removes money from the economy.