April 13, 2011

On The US Budget Deficit & Debt



Obama adds fuel to confusion but no resolution, Mohamed El-Erian:

A friend and former colleague of mine, Paul McCulley, once made the distinction between those who were "responsibly irresponsible" and those who were "irresponsibly irresponsible". The two notions explain why more unsatisfactory last-minute policy compromises are now likely, despite President Barack Obama's impressive speech on how America must move forward to tackle its debt ceiling, and its wider problem of budgetary reform.

Mr Obama proposed cutting $4,000bn from deficits over the next 12 years, reducing government outlays to Medicare and Medicaid healthcare programmes, and even considered tax increases. His speech therefore provides an important opportunity to advance this debate, but a much broader context is still needed if it is to succeed in overcoming both domestic political stalemates and growing concerns abroad.

Back in the final quarter of 2008 and the beginning of 2009, it was right for the US to behave responsibly irresponsible. At that moment every available part of the public sector balance sheet, from the Federal Reserve's to the Federal budget, had to be used to avoid an economic depression. And it worked.

The radical right and the US state by Martin Wolf:
What does the rise of libertarianism portend for the future of the US? This is not a question of interest to Americans alone. It matters almost as much to the rest of the world. A part of the answer came with the publication of a fiscal plan, entitled "Path to Prosperity", by Paul Ryan, Republican chairman of the house budget committee. The conclusion I draw is the opposite of its author's: a higher tax burden is coming. But that leads to another conclusion: much conflict lies ahead, with huge implications for politics, federal finance and the US ability to play its historic role.

An analysis of the Ryan plan by the Congressional Budget Office makes the point. Its "extended-baseline scenario" assumes that current law remains unchanged. Under that assumption, revenue would rise from 15 per cent of gross domestic product to 21 per cent in 2022 and on to 26 per cent in 2050. Spending would rise substantially, too, from 23¾ per cent of GDP in 2010 to 30¼ per cent in 2050. As a result, the deficit would fall from today's levels while debt held by the public would rise to 90 per cent of GDP in 2050.

As the CBO makes plain, this is an optimistic scenario. Current law includes, most notably, the assumption that the 2001 and 2003 tax cuts will expire, as legislated. Together with the impact of fiscal drag from economic growth and inflation, this generates the rising share of revenue in GDP. On the side of spending, the share of social security in GDP rises modestly, from 4¾ per cent of GDP in 2010 to 6 per cent in 2050. The share of all other spending (including defence), apart from that on health, is assumed to fall to close to its long-run average of 8 per cent of GDP. But health spending explodes, from 5½ per cent of GDP in 2010 to 12¼ in 2050.

Posted by jez at April 13, 2011 7:49 PM | Subscribe to this site via RSS:
Posted to Current Events | Investing | Leadership | Politics | Taxes