"A billion here, a billion there, and pretty soon you're talking about real money."
To paraphrase the late Senator Everett Dirksen (R-Illinois), if a couple billion is real money, what's $400 billion amount to? Fiscal trouble for the United States, says an economist.
The U.S. federal budget deficit will double this year, to $407 billion, from $161 billion last year, the Congressional Budget Office announced Tuesday, in its revised baseline projection report (pdf).
The CBO said a weakening economy, spending for the Iraq and Afghanistan Wars and the War on Terror, higher entitlement spending, and a slowing growth rate in federal receipts are among the factors that will push the deficit to 3% of GDP this fiscal year, which ends September 30.
The deficit will rise to $438 billion next year, fiscal 2009, remain roughly at that level, $431 billion, in fiscal 2010, before tapering to $325 billion in fiscal 2011.
The CBO also expects U.S. GDP to grow just 1.5% in 2008 and slow to 1.1% in 2009.
Economist Glen Langan said the multiple $400 billion deficits are bad enough, but they could rise considerably, if the U.S. Treasury's bailout of Fannie Mae and Freddie Mac does not go well. "If the housing market does not stabilize in the year ahead, Treasury could end up spending tens of billions more per year," Langan said. "Nearly all of that cost would be born by the taxpayer, which means the deficit will increase."
Deficit balloons further if Bush tax cuts don't expire
Just as distressing, in Langan's interpretation, is the fact that although the deficit declines to $126 billion in fiscal 2012, the annual shortfall never disappears, he said. Even more problematic, Langan said, the lower deficits in 2011 and 2012 assume that President Bush's 2001 tax cuts are all allowed to expire. "If President Bush's tax cuts are not allowed to expire, the deficit will exceed $500 billion annually in short order. A truly dizzying total," he said.
Hence, the next president "will face some very hard budget choices," Langan said.
Republican nominee U.S. Senator John McCain, R-Arizona, said he wants to cut income taxes.
Democratic nominee U.S. Senator Barack Obama, D-Illinois, said he wants to raise the top marginal tax rate back to 39.6% from 35% for those tax filers earning more than $250,000 per year.
Can the next president cut income taxes? "Any tax cuts would have to be made up by tax increases or revenue increases elsewhere," Langan said. "The only way you could cut marginal tax rates and still reduce the deficit is massive spending cuts for existing defense programs, combined with cuts in other major spending areas, such as Social Security, Medicare, and Medicaid, and housing, which doesn't seem likely."
Economic Analysis: The higher $400 plus billion deficits also would likely increase long-term interest rates, as the U.S. Government competes for capital with the private sector. Those higher interest rates would hurt commerce, and further slow the U.S. economy. The bottom line: some form of income tax increase is up ahead -- the only question is, who pays?
How would you cut the budget deficit? Cut spending? Raise taxes? Both? If you'd cut spending and/or raise taxes, which programs would you cut and what taxes would you raise? Let us know what you think.
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