This is not a blogger telling you that loose budgets are going to cause huge problems, this is a blogger summarizing what the Congressional Budget Office is warning. Congress must fix the finances and budget of the United States with a tightening plan or there will be a crisis and far more austere spending and restructuring will be forced upon the US.
The extended-baseline scenario adheres closely to current law, following CBO’s 10-year baseline budget projections through 2020 (with adjustments for the recently enacted health care legislation) and then extending the baseline concept for the rest of the longterm projection period. The alternative fiscal scenario incorporates several changes to current law that are widely expected to occur or that would modify some provisions that might be difficult to sustain for a long period.
Certain changes to current law are widely expected to be made in some form over the next few years, and other provisions of current law might be difficult to sustain for a long period. Therefore, CBO also developed an alternative fiscal scenario, in which most of the tax cuts originally enacted in 2001 and 2003 are extended (rather than allowed to expire at the end of this year as scheduled under current law); the alternative minimum tax is indexed for inflation (halting its growing reach under current law); Medicare’s payments to physicians rise over time (which would not happen under current law); tax law evolves in the long run so that tax revenues remain at about 19 percent of GDP; and some other aspects of current law are adjusted in coming years.
How Might a Fiscal Crisis Affect the United States?
In all three of those fiscal crises in other countries, sharp increases in interest rates on government debt forced the affected governments to make difficult choices. The U.S. government would also face difficult choices if interest rates on its debt spiked. For example, a 4-percentage point across-the-board increase in interest rates would raise federal interest payments next year by about $100 billion relative to CBO’s baseline projection—a jump of more than 40 percent. As longer-term debt matured and was refinanced at such higher rates, the difference in the annual interest burden would mount; by 2015, if such higher-than-anticipated rates persisted, net interest would be nearly double the roughly $460 billion that CBO currently projects for that year. Moreover, if debt grew over time relative to GDP, the effect of a spike in interest rates would become increasingly pronounced.
A sudden increase in interest rates would also reduce the market value of outstanding government bonds, inflicting losses on investors who hold them. That decline could precipitate a broader financial crisis by causing losses for mutual funds, pension funds, insurance companies, banks, and other holders of federal debt—losses that might be large enough to cause some financial institutions to fail.12 Foreign investors, who owned nearly half of U.S. debt held by the public in May 2010 (or about $4.0 trillion, $1.7 trillion of which was held by Japan and China alone), would also face substantial losses
With the ink barely dry on a $858 billion tax cut and emergency spending bill, lawmakers were hit with an official reminder last week that steps to rein in the nation’s growing debt cannot be postponed much longer.
According to the 2010 Financial Report of the U.S. Government, released on December 21 by the Treasury Department, “under current policies and the assumptions used in this report the debt-to-GDP ratio will continually increase over the next 75 years and beyond, which means current policies are not sustainable.”
The report further warns, “the longer policy action to avert these trends is delayed, the larger the projected revenue increases and/or spending decreases necessary to reach a target debt-to-GDP ratio.”
These conclusions were contained in a new section of the annual Financial Report titled ”Statement of Long Term Fiscal Projections.” In assessing the present value of projected non-interest spending and revenues over the next 75 years, the report estimates an average gap of 1.9 percent of GDP. Persistent deficits of this magnitude would cause the debt-to-GDP ratio to steadily rise from 62 percent of GDP in 2010 to 130 percent in 2040, and to 350 percent by 2085. Interest on the debt would climb from 1.4 percent of GDP in 2010 to 19 percent by 2085.
Stabilizing the debt-to-GDP ratio at its current level, which is high by historic standards, would require average primary surpluses (i.e., non-interest spending over revenues) of 0.5 percent of GDP over the 75-year time frame. This would require policy changes amounting to 2.4 percent of GDP on average. Delaying action by 10 years would boost that figure to 2.9 percent of GDP.
More alarming is that the projections used in the Financial Report are far from a worst-case scenario.
The projections also assume that a 30 percent cut in Medicare physician reimbursements will occur as scheduled over the next three years.
Heavy government borrowing, however, would put upward pressure on interest rates. If they were to grow along with the debt, the report warns, it could lead to “the point where there may be no feasible level of taxes and spending that would reduce the debt-to-GDP ratio to its 2010 level.”
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