Oh yes, America’s fiscal situation is a dreadful mess.
The White House says the federal government will run a $9 trillion budget deficit over the next decade. As a percentage of the total economy, the United States looks to have an astounding debt-to-GDP ratio of 11 percent this year, with that number declining to around 4 percent from 2015 though 2019. And total debt held by the public will rise to 68 percent of GDP by that year versus 33 percent in 2001.
Those numbers, however, are actually a bit on the rosy side. In his blog, Douglas Elmendorf, director of the Congressional Budget Office, notes that the forecasts presume no change in current tax laws, such as the continued existence of the Bush tax cuts and the alternative minimum tax (AMT), which grabs more and more taxpayers ever year at a lower and lower income level.
Such forecasts also assume annual spending increases grow at the rate of inflation. But tomorrow is rarely the same as today in Washington. A more realistic scenario — if the AMT were indexed for inflation, most of the Bush tax cuts continued and spending rose as it has in the past — would see the deficit at 8.5 percent of GDP in 2019. That is a level, before the current crisis, not seen since World War Two.
Budget numbers like these are generated on a cash accounting basis. They don’t take into account the underfunding of America’s vast entitlement programs and the annual changes in the net present value of those programs.
Calculated on an accrual basis, much as a corporation would estimate its pension and healthcare liabilities, the annual deficit number would be at least $6 trillion this year. In 2008, for example, the headline budget number — the one calculated on a cash in, cash out basis — was $454 billion. But if you ran the number as the federal deficit plus the net present value of all those unfunded liabilities, the deficit was $5.1 trillion with total fiscal obligations at $66 trillion. As Elmendorf dryly puts it: “Putting the nation on a sustainable fiscal course will require some combination of lower spending and higher revenues than the amounts now projected.”
And that is The Choice. Does America want to be a low-tax nation with a government that does less than it does now, or a higher-tax nation with an even bigger public sector? Right now, it sort of wants both. You can see that not only in today’s budget numbers, but also in the healthcare debate, where a fair reading of the polls reveals Americans want to contain costs while also having every high-tech solution and test available to them.
The politicians are certainly no better. When the Republicans wanted to fix Social Security, Democrats argued the program was in good shape. And now when Democrats want to trim Medicare costs, the GOP plays the defender of seniors.
So put me down for 8.5 percent in the 2019 debt-to-GDP ratio office pool, OK?