The US Deficits Problem

blr-editor | May 9, 2011 | Comments (0)

The US is drowning in a sea of red ink

Even the casual reader of financial publications will know that the United States has a huge and worsening problem with its current account deficits. In 2010, the deficit was $1.29 trillion, which followed a record $1.42 trillion in 2009 – a shocking 10.0% of GDP and the highest in nearly 65 years.

For 2011, the federal budget deficit is projected to reach $1.5 trillion or 9.8% of GDP. This is higher than in 2010 and almost equal to the historical record of 2009.

The Congressional Budget Office (CBO) estimates that federal revenues in 2011 will be $123 billion (or 6%) more than the total revenues from two years ago, in 2009.

The continued slow improvement in economic conditions is anticipated to boost revenues from individual income taxes, corporate taxes, and other sources by nearly $200 billion between those two years.

However, revenues from social insurance taxes will fall by more than $70 billion relative to 2009, resulting from the one-year reduction in payroll taxes included in the 2010 tax act.

The CBO also projects deficits beginning to fall if economic conditions continue their slow recovery from the recession. That of course, is a big ‘IF’, depending on:

(a) planned reductions in Medicare reimbursements in 2012,
(b) new planned budget cuts in discretionary and non-discretionary programs
(c) ending extensions to unemployment compensation,
(d) the expiration of programs such as the Economic Growth and Tax Relief Reconciliation Act of 2001, the Jobs and Growth Tax Relief Reconciliation Act of 2003, and ARRA at the end of 2012

So there is the potential for the US to reduce deficits if the political will exists. The recent downgrading of US prospects, if not the actual credit rating by Standard and Poor appears to have lit a fire under politicians currently stuck in gridlock.

President Obama and Congressman Paul Ryan have differing budget priorities

Does the will exist to compromise in Congress? On the one side we have those who are firmly against taxing the rich in a progressive manner, while others see all social programs as sacrosanct. On top of this, the polarized partisan environment among lawmakers raise serious worries about their ability to reach meaningful legislation to make the kind of cuts needed and to raise the taxes that are also needed to save the country going over the financial precipice.

Continuing deficits of 10% of GDP is simply put, unsustainable. The events in Europe should give all our lawmakers pause. Sadly, it is not. Even the stock market has shrugged off the Standard and Poor warning as the Dow approaches 13,000. The canary in the coalmine is the falling dollar, but are the legislators and the President really listening? Only time will tell.