Category Archives: Peter G. Peterson Foundation

The House Budget vs the President’s Budget: Another Reason for a Balanced Budget Amendment

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In January I had several posts advocating in favor of a Balanced Budget Amendment to the U.S. Constitution.  Briefly, the argument runs as follows:

  • Our public debt (on which we pay interest) is now at 74% of GDP, the highest it has been since the end of WWII.
  • Democrats want to raise taxes and increase spending; Republicans want to cut taxes and decrease spending. The only way to satisfy both parties simultaneously is to run huge annual deficits which is exactly what has happened ever since the end of the Great Recession in 2009.

Current planning for the next budget year beginning October 1, 2016 has now begun. Both the House Budget Committee and the President have budget proposals for next year. As reported by the Peterson Foundation, these two budgets differ substantially:
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  • The President’s budget would hold the public debt at about 75% of GDP over the next ten years by both raising taxes and increasing spending on a variety of programs.
  • The House Budget Committee plan keeps revenues steady at 18.2% of GDP over the next ten years and achieves a balanced budget after ten years. By 2026 the debt held by the public would fall to 57% of GDP from its current 74% level.

Here are two significantly different ten year budget plans. What is likely to happen is a complete standoff without any bipartisan agreement.  This means that no appropriations bills for individual government agencies will be enacted by October 1.  Finally, as usual, an omnibus spending bill will be put together by Congressional leaders and forced through at the last minute to avoid a government shutdown.
A BBA would make both sides compromise and come up with an overall plan.  It would likely contain both spending restraint and new sources of revenue.  Then the various Congressional committees would hammer out the spending details for individual agencies and department.  It would be a far more sensible and transparent process than the way things are done now.
Congress and the President have to be forced to act in such a reasonable manner.  A Balance Budget Amendment is perhaps the only way to make this happen.

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Could the U.S. End Up Like Greece? II. How Long Will It Take?

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My last blog post, “Could the U.S. End Up Like Greece?” compares Greece’s present fiscal situation (public debt at 180% of GDP) with our own current fiscal situation (public debt at 74% of GDP and rising fast).  The Congressional Budget Office predicts that, under current policy, the U.S. debt will not reach 180% until about 2055, forty years from now.  One could (wrongly!) conclude from this that we are okay for the time being.
CaptureHowever, this is not true!  The Peter G. Peterson Foundation has taken a closer look at the most recent CBO report.  Under a less optimistic, but more realistic, Alternative Fiscal Scenario, the U.S. debt will reach 175% in 2040.  The Alternative Fiscal Scenario assumes, for example, that:

  • About 50 expiring tax breaks will continue to be extended year by year, as they were in 2014 and have been repeatedly in the past. These “tax extenders” increase the deficit by over $40 billion per year.
  • Discretionary spending will soon rise back up to its historical share of GDP. In other words, the sequester, which is currently holding down the growth of discretionary spending, may be overridden or at least relaxed.

Greece, with its debt at 180% of GDP, is only being required by the European Central Bank to pay 1.7% interest on this debt indefinitely into the future.  Thanks to the low interest rate policy of the Federal Reserve, 1.7% is also the current rate of interest being paid on the U.S. debt.  But this historically low interest rate is unlikely to continue much longer without setting off a much higher rate of inflation.
In other words, we’ll likely be in the same situation as Greece is currently, in much less than 25 years.  Furthermore, Germany and the other EU countries have been keeping Greece afloat for years and may continue to do so.
Who is going to bail us out when we get to where Greece is now?  China?  Unlikely.  We’ll be on our own and it won’t be pretty!