As most Americans no doubt know, our country has substantial financial problems that require urgent attention. If appropriate action is not taken, the problems will only get worse and become much more difficult to deal with. Virtually all of us will ultimately be materially affected, depending on what happens or doesn't happen.
One of the biggest problems is our unsustainable federal budget deficit, that is the annual fiscal year difference between U. S. government revenues or receipts and spending or outlays. For both years ending September 30th in 2009 and 2010 the federal deficit has ballooned to roughly $1.4 trillion, equivalent to between 10% and 11% of the country's Gross Domestic Product (GDP), the highest rate since the end of World War II. So the government is spending $1.4 trillion more than its receiving in taxes and other receipts and can only do so by borrowing this amount from creditors, including especially in recent years China.
The borrowing adds to our outstanding public debt, which totaled $13.56 trillion or as much as 94% of annual GDP at the end of the last fiscal year. It also adds to huge amount of interest we must pay on this high debt level, budgeted at $164 billion for fiscal 2010! As the debt increases with large annual deficits and interest rates very likely growing significantly in future years, the interest burden will increase dramatically. Obviously this financial situation is unsustainable and moreover it is threatening our prosperity and important role in global affairs.
Recognizing the seriousness of this issue, President Obama appointed an 18 member bipartisan deficit commission in February this year co-chaired by former U. S. senator Alan Simpson, a Republican, and former chief of staff under President Clinton, Erskine Bowles, a Democrat. In a 59 page report the commission has come up with a large number of prudent proposals that reasonably well address the difficult deficit problem and likely become starting points for President Obama's budget plan for FYE 2012 as well as the budget plan to be put together by the Republicans when the new Congress convenes in January.
The full commission is scheduled to vote on the proposals at a meeting tomorrow. If 14 or more members vote favorably on the package, the commission will issue a formal recommendation to Congress and the White House. Even if that doesn't happen, I think the commission has done its job and its proposals will still probably serve as reasonable starting points for the plans of both parties.
The commission's report is based on a plan to reduce the deficit 75% through spending cuts and 25% through revenue (largely tax) increases. Among noteworthy spending cut proposals are freezing pay for federal workers, including members of Congress, for 3 years; cutting congressional and White House budgets by 15%, eliminating all congressional earmarks; and increasing the minimum age for receiving full Social Security benefits over a long timeframe. Revenue increases would come from, among other sources, a 15 cent per gallon gas tax increase (rate is currently 18.4 cents) and reworking the IRS tax code including eliminating itemized deductions and interest deductions on mortgages above $500,000 on individual tax returns, and closing tax loopholes which induce American companies to base operations abroad. Most of these changes are not planned to be implemented until 2012.
How the panel proposed to deal with the huge $453 billion spending on Medicare and $290 billion on Medicaid is rather complicated and not entirely clear, but they have recommended to increase cost sharing for Medicare recipients, reduce payments to physicians for services rendered and to hospitals for medical education services, and focusing more on eliminating Medicare fraud, among a long list. Importantly, the panel seems unanimous in not wanting to adversely impact the very poor in our population in their recommendations.
I generally have no problem with the above proposals, given what's at stake, except that we shouldn't necessarily wait to implement every proposal until 2012, such as beginning to cut Defense expenditures by closing down unnecessary or marginally needed overseas military bases. Other reactions:
1. With 70% of aid going to the largest 10% of agribusinesses, why not finally eliminate all farm subsidies, which can save us $25 billion annually, rather than just a fraction of this aid?
2. The current tax deduction for interest on mortgages apparently costs the federal government $130 billion annually. Retaining the deduction for homeowners whose mortgages are under $500,000, but eliminating it for those who have a larger mortgage makes sense. I'd also be open to a tiered structure where the elimination partially begins at say $300,000 and gradually increases to the $500,000 level. Hopefully any of the realistic options could save us close to $100 billion each year.
3. How about increasing the federal tax on cigarette sales, currently $1.01 per pack, and other tobacco products? It might not have a significant impact on current federal revenues, but it may induce fewer people to smoke, especially teenagers, and thereby reduce future federal spending on health care through Medicare and Medicaid.
4. We should consider reasonable means testing for Social Security recipients, so that those who earn more than, say, $250,000 in current dollars, who do not really need this income, do not receive any Social Security, or perhaps no more than 50% of what they would have been eligible for.
5. Noting that the panel is recommending 15% cuts in the budgets of Congress and the White House, why not the same cuts for all the federal departments and agencies, or are these included already in the White House budget?
We won't know exactly how all this will turn out for at least several months, and it could be years, but I'm cautiously optimistic that the government is finally on the right track toward a more viable and balanced budget. Hopefully, Speaker-elect John Boehner and President Obama and their staffs can work together to get this achieved on a basis that can be approved by Congress and judged fair and satisfactory by the majority of the American people. However, unfortunately there is a real possibility that stubborn and ill-advised partisanship pushed by the more radical groups on both the left and the right will jeopardize and delay a prudent outcome.