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U.S. on the Brink of Bankruptcy?

Economics / US Debt Feb 03, 2010 - 05:28 AM GMT

By: Money_Morning

Economics

Best Financial Markets Analysis ArticleMartin Hutchinson writes: U.S. President Barack Obama's budget for 2011, presented on Monday, shows a deficit of $1.3 trillion for the fiscal year that ends that September. That shortfall is actually $287 billion more than the Congressional Budget Office (CBO) had projected less than a week earlier, when it had released a budget forecast of its own for that same fiscal year.


Granted, we're getting used to seeing budget deficits expand at a pretty quick pace these days. But even by government standards an increase of nearly $290 billion in less than a week is almost too much to bear!

All kidding aside, $105 billion of this $287 billion increase came about mostly because of a change in "assumptions." The CBO budget assumed that all the 2001 Bush tax cuts would be reversed, whereas the Obama budget reverses only those that applied to the rich (those with incomes above $250,000).

The CBO budget also made the ridiculous assumption that the Alternative Minimum Tax (AMT) would be allowed to revert to its 2001 level, forcing 25 million taxpayers to calculate their taxes twice - and to then pay the higher of the two estimates. That was never going to happen, and the Obama budget finally abandons that idiotic piece of fiction.

The disparity in deficit projections between the CBO and the Obama administration weren't limited just to fiscal 2011. For the period from 2011 to 2020, the CBO forecasted a budget deficit of $6.047 trillion, while the Obama budget released just days later projected a shortfall of $8.532 trillion - a difference of $2.485 trillion.

The difference in assumptions between the CBO and Obama projections explains nearly half of that difference. Of course, that still leaves the other half.

And a troublesome half it is.

In 2011, most of the extra spending seems to be devoted to a jobs program and to additional defense expenditures for the wars in Iraq and Afghanistan. It's somewhat disheartening to see that the administration can't project more progress on the budget-deficit issue during the next few years.

After all, the Obama budget even assumes that we'll be helped along by a robust economic recovery.

The lowest projected deficit in the next decade is a $706 billion shortfall forecast for the fiscal year that ends in September 2014. That doesn't sound too bad in the context of the 2009-2011 figures, but it's almost $300 billion larger than the highest federal-budget deficit in human history before 2009.

The most alarming trend of all appears if you compare the current budget with what had been projected for the fiscal 2002 budget, a forecast made in February 2001 by U.S. President George W. Bush, who was in his first year in office. As is the practice today, budget projections back then were made in 10-year increments. So it's worth comparing the spending projections for 2011 made by the Bush administration with what's actually been put into the budget.

Our finding: The February 2001 projections were hugely too optimistic; current spending is fully 41% higher than what had been projected at that time.

That has two implications. First, it shows that budgetary control by both parties since 2001 has been utterly lousy (the Republicans controlled the presidency and the U.S. House of Representatives for the 2002 through 2007 budgets, but spending still soared). Second, it shows that out-year projections a decade into the future are often ludicrously over-optimistic.

The implications for the current budget are ominous. If 2020 spending exceeds current projections to the same degree that current spending exceeds the projections made back in 2001, then spending will amount to 33.4% of 2020 gross domestic product (GDP). Add in state and local spending, and total U.S. public expenditure would exceed 50% of GDP, close to that of the worst European countries: France and Sweden.

What's more, since 2020 revenue is projected at only 19.6% of GDP, taxes would have to go up by 70% from currently projected levels to make the budget balance.

Yikes! Even if we introduced a federal Value Added Tax to try to meet that deficit, it would have to be set at an impossibly high rate.

The current budgetary shambles is the fault of two presidential administrations, and both parties in Congress. They have wrecked what back in 2001 was a perfectly solid U.S. budgetary position.

If U.S. budgetary problems continue on their current path, our elected officials in Washington will completely destroy the U.S. financial position in the next decade, and will lead the nation into bankruptcy.

We need an immediate improvement in politician behavior on both sides of the aisle.
Otherwise, it will be too late.

Source: http://moneymorning.com/2010/02/03/obama-deficit-2/

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