Panel
America's Debt and the Economy: A Hard Look at Public Spending and Finance
- The debt-to-GDP ratio is projected to rise from a current high of approximately 75% and continue increasing inexorably beyond 2016, with the path described as unsustainable without major reforms.
- Mandatory spending is expected to consume 13.6% of GDP and rise, combined with security spending at 5% and debt service at 1.5%, leaving no room for discretionary funding needed for national security, research, infrastructure, or education.
- A one-percentage-point increase in interest rates is predicted to add between $1.2 trillion and $1.3 trillion in interest payments over a 10-year period.
- Three primary negative outcomes are identified if current trends persist: a potential third-world style debt crisis, a scenario where global credit markets force radical tax increases detrimental to investment, or a failure to control mandatory spending leading to a damaged economy for future generations.
- The disability trust fund is forecast to go bankrupt in 2016, while Social Security is actuarially sound on paper only by promising a 25% across-the-board benefit cut for retirees 20 years from now.
- Without mandatory spending reform, Medicare is expected to fall under its own financial weight, and the U.S. will lack the fiscal flexibility to handle future economic downturns compared to the low 70s debt levels of 2008.
- Discretionary spending has been reduced to the lowest level of domestic investment recorded since 1961, a situation exacerbated by sequestration and mechanical spending caps that prevent funding for critical public sectors.
- The current political environment is characterized by a gridlock where one faction refuses to raise revenues and another refuses to touch entitlements, preventing a "grand bargain" of revenue and entitlement reform.
- Political action on the budget is expected to be delayed in limbo until at least the next election, with significant legislative changes unlikely until a presidential election provides a mandate to a party with a supportive Congress.
- Market forces are unlikely to force immediate change as the debt-to-GDP ratio is expected to hover around 73% and credit markets remain quiescent, meaning a crisis may erupt only after significant political friction.
- Immigration reform is estimated to generate $900 billion in deficit reduction over 20 years and provide dramatic economic benefits by addressing sub-replacement fertility, though it faces the same political hurdles as other issues.
- Tax reform is viewed as an important objective that should broaden the base and lower rates, as the current revenue base is insufficient to sustain the existing spending system.
- The country faces a loss of compromise and leadership, with politicians avoiding ownership of difficult decisions regarding tax increases and spending cuts, often resorting to outsourcing hard choices to commissions.
- The economy is currently worse off due to borrowing during favorable conditions rather than spreading borrowing over the business cycle, and for every year changes are delayed, less time remains to address the structural imbalances.
- A shift from consumption spending to public investment is necessary to improve long-term economic growth, as the current emphasis on consumption is expected to hinder economic expansion.