[Obama's] budget is toast. Don't be fooled by statements that claim the "Obama budget" is moving through Congress. Ever since the Congressional Budget Office announced that Obama's plan would increase the national debt from 41 percent of GDP in 2008 to 82 percent in 2019, it became irrelevant.
In a March 26 news release, House Majority Leader Steny H. Hoyer, D-Md., led with this statement: "The Democratic budget resolution, passed out of committee yesterday, reaffirms President Obama's and the Democratic Congress' commitment to a long-term plan to restore fiscal responsibility." And on the House floor, House Speaker Nancy Pelosi, D-Calif., stretched the limits of credibility with this comment: "The Spratt proposal balances the budget."
On March 26 Office of Management and Budget Director Peter Orszag released a statement implying that because the congressional budget resolutions preserved the president's goal of "cutting the deficit we inherited in half before the end of the President's first term," those plans will "put our nation on a path of fiscal sustainability."
It seems that the only place you can get an honest assessment from a Democrat is in the Senate. There, Budget Committee Chair Kent Conrad, D-N.D., described the budget situation this way: "We are on a course that is unsustainable. I do believe that the five years of the budget mark of [the budget resolution] that I am laying down puts us on a much healthier trend line. But I in no way represent that my mark or the president's budget deals effectively with the long-term threat to this country."
Some of Martin's observations on the implication of the growing debt load:
- More debt crowds out private capital formation
- More debt hurts intergenerational equity
- More debt increases the temptation for inflation
- More debt reduces fiscal breathing room for future crises
Martin's gloomy conclusions:
Here's our prediction for the future. One or more of the following must happen: (1) taxes increase significantly; (2) entitlements are cut significantly; (3) economic growth exceeds anyone's wildest hopes and saves the day; or (4) the debt ratio continues to skyrocket, threatening inflation and financial turmoil.
How painful? Projections under the Senate plan would leave the debt-to-GDP percentage at about 60 percent at the end of 2010 (when, hopefully, the recession will have run its course) and at about 120 percent at the end of 2030. To keep the debt-to-GDP percentage at 60 percent (keeping the ratio of debt-to-GDP constant meets the economists' standard of sustainability), the government would have to cut spending or increase taxes to reduce the deficit by 2.7 percent of GDP each year. In 2009 that is $380 billion.
That means that if Congress approves the Senate budget and it wants to keep the debt-to-GDP level at 60 percent (far above historical averages), it must, starting in 2010, cut the deficit each year by an additional amount equivalent to $380 billion.
To give you a better feel for the difficulty, here are some options that could achieve this deficit reduction goal: (1) raise both the individual and corporate income taxes by 25 percent; (2) impose a broad-based 6 percent VAT; (3) cut defense spending by 55 percent; (4) cut Medicare spending by 90 percent; or (5) cut Social Security benefits by 60 percent.
All of the proposed realistic approaches to trimming the deficit will not be received with the same enthusiasm that Obama's ever more frequent TV appearances engender.
Deficits as a Percentage of GDP Under the Obama Budget And the House and Senate Budget Resolutions
Debt as a Percentage of GDP Under the House and Senate Budget Resolutions
Projections of Federal Debt as a Percentage of GDP Under Various Democratic Budget Proposals, 2008-2030
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