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The Long-Term Fiscal Status Of The United States

The good news is the fiscal outlook of the United States government is suddenly much brighter.  The bad news is things are so much better than just a couple of years ago that Congress might squander the opportunity because lawmakers no longer feel great urgency to address the long-term fiscal problems threatening the country. 

The Congressional Budget Office, the non-partisan research arm of Congress, released a 10-year projection on February 24, 2014 of the U.S. Government’s spending and revenue, showing that the federal budget deficit increases only slightly over the next 10 years.  This is an amazing turnaround.

In 2012, the fiscal condition of Greece, Italy, Portugal and Spain sent investors worldwide scrambling in search of safe havens because they feared the poorer countries of the EU would be unable to pay their debts.  At that time, some members of Congress publicly voiced fears that the U.S. was headed for the same fate as the poorer nations of southern Europe, which sent the U.S. stock market into a temporary tailspin. But the U.S. economy has proven resilient. 

Aggregate government spending as a percent of gross domestic product does not appreciably increase over the next decade, according to the latest CBO estimate.  In comparison, in the depths of the financial crisis in 2009, according to the CBO, the U.S. Government deficit was equal to 9.8% of the total U.S. economy.  That was when fears that the U.S. was headed the same direction as Greece and Portugal hit its peak.

Then the economy turned around.  Sequestration forced a 10% across the board cut to U.S. Government spending in 2013. Congress passed a new tax law that hiked income tax rates and raised new government revenue. According to CBO, the U.S. Government is on course to hit just 2.6% deficit as a percent of GDP in 2015, nearly a quarter of the ratio just a few years earlier. 

While on its face this is very good news, it could make it more difficult for Congress to find the political will to address the longer-term issues threatening the long-term financial stability of the U.S.  The long term financial picture of the U.S. – projections made by CBO in an annual report issued in December 2013, provided a 50-year projection of the U.S. fiscal position that shows that the long-term solvency of the U.S. remains under great pressure and deteriorates rapidly after 2024. 

According to data from CBO, spending by the federal government as a percent of GDP on Medicare, Medicaid, and Social Security remains stable over the decade ending 2024.  However, spending on these programs increases starting in 2024, CBO’s report shows.  In addition, the biggest expense that goes along with all this government spending is the interest expense.  To be clear, all of the government spending is paid for with borrowed money that is raised from the proceeds of U.S. Treasury Bond sales.  Interest expense on the Government debt to pay for Social Security, Medicare and Medicaid skyrockets over the next 50-years.

So here’s the problem:  Unless the U.S. Government does something to reduce government entitlement programs, the U.S. is headed for fiscal oblivion.  But the nearer-term picture – the outlook over the decade ending in 2024 — is good.  The fiscal condition of the U.S. looks strong for the next decade, which could be bad news if it means Congress can “kick the can” further down the road and delay addressing the real problem threatening the U.S. Government’s fiscal stability. 

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