How to fix US debt without hurting fragile economy

Published on NewsOK Modified: February 27, 2013 at 11:32 am •  Published: February 27, 2013
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Europe's experience shows that hasty budget cuts can be counterproductive when economies are weak. Despite slashing spending and raising taxes, Britain, Spain, Portugal and Italy have all seen their debt burdens rise. Their economies shrank because of the painful austerity measures, which meant their debts grew as a percentage of gross domestic product, or GDP, the broadest measure of economic activity.

The best medicine for swollen federal debts, experts of all political persuasions agree, is stronger economic growth. A healthy economy means more people are working, earning money and paying taxes; and fewer are collecting federal benefits such as unemployment checks and food stamps.

Already, a slowly improving economy has helped whittle the United States' federal deficit. The deficit peaked at $1.4 trillion at the depths of the Great Recession in 2009 and has been falling ever since. The Congressional Budget Office says it will fall to $845 billion this year if the automatic cuts take effect.

— REFORM THE TAX CODE

The U.S. tax system is riddled with tax breaks that benefit everyone from homeowners to oil and gas companies. These tax breaks cost the Treasury $1.3 trillion last year, according to the nonpartisan Tax Policy Center.

Economists say the loopholes warp the economy by diverting investment away from projects that make economic sense and into those that are subsidized by tax breaks. Economists and budget analysts say the government could raise revenue and improve economic efficiency by ending some of the tax breaks.

Among those calling for ending or scaling back most tax breaks are the Bipartisan Policy Center and former Republican Sen. Alan Simpson and former Clinton administration official Erskine Bowles, co-chairmen of a presidential commission assigned to find ways to reduce the federal debt.

Of course, getting lawmakers to end the tax breaks won't be easy. The loopholes are popular. And Congressional Republicans are currently refusing any budget deal that raises tax revenue by closing loopholes.

— TARGET ENTITLEMENT PROGRAMS

The most serious threat to the federal government's finances is America's aging population. As baby boomers have begun to shuffle into retirement, they are tapping Medicare health care benefits and collecting Social Security.

The CBO sees federal deficits falling through 2015 as the economy improves and the automatic budget cuts reduce spending. But then the deficits start rising again inexorably because of higher health care spending and rising interest payments on the federal debt. The debt will near $20 billion by 2030 if nothing is done, according to the CBO.

Many Democrats have resisted efforts to slow the growth of Medicare and Social Security. Economists say Democrats will have to accept the reality that the government can't keep spending at its current pace indefinitely.

America spent more than $8,200 per person on health care in 2010. That's the most of any country and more than 50 percent higher than No. 2 Norway's $5,388 per person.

The automatic spending cuts largely leave health care and Social Security spending alone. Instead, they zero in on the rest of the federal budget — so-called discretionary programs — including defense spending. But the 2011 budget agreement already took an ax to discretionary programs. The White House says they are already scheduled to fall to 5.7 percent of U.S. GDP by 2017 — the lowest level in budget records dating back to 1962. Discretionary spending accounted for nearly 37 percent of the $3.8 trillion the federal government spent last year; so-called mandatory programs, including Social Security and Medicare, accounted for 61 percent.

"By far the preferable policy," Macroeconomic Advisers says, "is a credible long-term plan to shrink the deficit more slowly through some combination of revenue increases within broad tax reform, more carefully considered cuts in discretionary spending, and fundamental reform of entitlement programs."



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