Wednesday, February 6, 2013

UNITED STATES: FISCAL DEFICIT

When Obama took office in 2009, the projected US 10-year deficits stood at $8 trillion. In one year, the figure’s jumped to $16.2 trillion. Is Obama on a fatal track?

Despite the fact that Obama has proposed a three-year freeze on discretionary spending, with exemptions for the military and national security (with big-ticket entitlements for programmes like Social Security, Medicare & Medicaid also excluded), to address the huge deficits, to save up to $250 billion over the next decade, that adds up to only about 3% of the deficit projected until that period. So, the question is – where will the other savings come from?

Sentiments at present are confused at the moment, even amongst those in the Treasury, at least as far as their communication with B&E goes. While on one hand, it is accepted that the perilous debt levels must be brought under control in the coming years ($700 billion by 2013), on the other, there are those who support that the record deficit spending was mandatory to revive the sluggish labour market. In fact, to this end, the budget has proposed about $100 billion in new stimulus measures, designed to lower the US unemployment rate from the current 10%, the highest levels it has touched in the past 25 years.

According to Obama Administration’s Office of Management & Budget (OAOMB), the total debt-to-GDP ratio stood at 83% in fiscal 2009 and is on track to hit 94% this year, 99% in 2011, and 101% in 2012. In fact, OAOMB feels that the debt could go even higher if Obama doesn’t do something about the Bush-era tax cuts on families earning over $250,000 a year and fails to freeze non-security discretionary spending for three years. This is certainly a matter of concern for an economy like US that has just managed to escape a fatal recession. In fact, the seriousness of the situation can be gauged from the fact that in a paper published last month called Growth in a Time of Debt, economists Kenneth Rogoff of Harvard University & Carmen Reinhart of Maryland University conclude that “Historically, advanced economies have slowed noticeably when their debt-to-GDP ratio has exceeded 90%.” For now, the figure is predicted to touch 94%, and will only rise in the years ahead, signalling a clear and present danger! Rogoff had told B&E late last year how the hidden problem also is individual states going bankrupt because of unaccounted state level debt.


Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).

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