On U.S. Fiscal Responsibility

President Obama is expected to make fiscal solvency the focus of his presidency in 2010, beginning with his State of the Union Address in January. This is a step in the right direction for his presidency and the country, but it is not enough. If we are honestly interested in solving our “debt problem,” then it is not enough to merely make fiscal solvency the focus of the Administration. Rather, sustainability will need to be the primary objective of the White House and Congress on every policy issue presented.

The Congressional Budget Office called the federal budget, in its current form, “unsustainable.” A working paper from the American Enterprise Institute highlights the CBO’s projections, with a concluding analysis.

According to several recent reports issued by the Congressional Budget Office (CBO), the U.S. federal budget is on an unsustainable path. In fiscal years 2009 and 2010, the federal government will record its largest budget deficits as a share of GDP since shortly after World War II. As a result of those deficits, federal debt held by the public will soar from 44 percent of GDP at the end of fiscal year 2008 to 61 percent at the end of fiscal year 2010. The current deficit is due in part to the stimulus legislation and efforts to stabilize financial markets. CBO (2009a) projects that spending related to such economic weakness will push primary spending (defined as all spending, except interest payments on federal debt) up to 26 percent of GDP this fiscal year, the highest since World War II.

The long-term budget outlook is equally troubling. The CBO report (2009b) projects that under the Obama Administration proposals, the cumulative deficit for the period 2010-2019 will be approximately $9.1 trillion. In other words, the average deficit per year will approach $1 trillion. After 2019, the situation is expected to worsen with deficits (under certain scenarios) projected at 17 percent of GDP by 2040.

These projections raise serious concerns about the long-term sustainability of U.S. fiscal policy. If spending grows as projected and revenues do not rise at a matching rate, annual deficits will climb and federal debt will grow significantly. As debt increases, a higher and higher share of national output will be devoted to interest payments, and the level of taxation needed to sustain government becomes historically unprecedented. Large budget deficits would reduce national saving, lead to more borrowing from abroad and also lower domestic investment. If such a path is to be averted, then changing policy sooner reduces the size of the problem significantly.

Fiscal solvency is the most-pressing long-term issue faced by the Obama Administration and the current Congress. Our fiscal recklessness undermines our economic future, the position of our currency in the world and threatens our position as the world’s pre-eminent economic superpower.

The need to save our economy from the brink of collapse and create jobs is, understandably, a top-priority. Beyond that, and beyond the current economic cycle, however, policymakers need to be committed to not only balancing our yearly budgets, but also lowering our debt load. It could even be said that if the United States had maintained over the past three decades a fiscal policy even somewhat resembling that of a responsible one, short-term deficits would not be a problem. Short-term deficits are acceptable if and only if the United States has a responsible long-term fiscal policy.

As our deficits grow and as we leave them unattended, more and more of the burden for repaying our debt will be passed on to my generation and my children’s generation. It will require more resources and a larger part of their economy to make these payments. That could mean a weaker social safety net and higher taxes. It could mean reduced military spending and the sacrifice of strategic security. It could mean cuts to education, transportation and more. The sacrifices we have to make today in order to put ourselves on a path to solvency will be marginal compared to the choices and challenges of the next thirty years, if we allow our fiscal irresponsibility to continue.