When Deficits Become Dangerous

February 17, 2010 05:14

Debt-to-GDP ratios over 90% have significant impact on the pace of economic growth.
February 11, 2010    via Freedom Project

President Barack Obama’s 2011 budget lays out a stunningly expensive big-government spending agenda, mostly to be paid for years down the road. He proposes to increase capital gains, dividend, payroll, income and energy taxes. But the enormous deficits and endless accumulation of debt will eventually force growth-inhibiting income tax hikes, a national value-added tax similar to those in Europe, or severe inflation.

On average, in the first three years of the 10-year budget plan, federal spending rises by 4.4% of GDP. That’s more than during President Lyndon Johnson’s Great Society and Vietnam War buildup and President Ronald Reagan’s defense buildup combined. In those same three years, spending on average hits the highest level in American history (25.1% of GDP), save the peak of World War II. The average deficit of $1.4 trillion (9.6% of GDP) is over three times the previous 2008 record.

Remarkably, President Obama will add more red ink in his first two years than President George W. Bush—berated by conservatives for his failure to control domestic spending and by liberals for the explosion of military spending in Iraq and Afghanistan—did in eight. In his first 15 months, Mr. Obama will raise the debt burden—the ratio of the national debt to GDP—by more than Reagan did in eight years.

Some specific proposals are laudable: permanently indexing the Alternative Minimum Tax for inflation, part of the increased R&D funding, reform of agriculture subsidies, a future freeze on one-sixth of the budget (only after it balloons for two years). But these are swamped by the huge expansion and centralization of government.

True, as he often reminds us, President Obama inherited a recession and fiscal mess. Much of the deficit is the natural and desirable result of the deep recession.

As tax revenues fall much more rapidly than income, these so-called automatic stabilizers cushioned the decline in after-tax income and helped natural business-cycle dynamics and monetary policy stabilize the economy. But Mr. Obama and Congress added hundreds of billions of dollars a year of ineffective “stimulus” spending—more accurately characterized as social engineering and pork—when far more effective, less expensive options were available.

The Obama 10-year budget—unprecedented in its spending, taxes, deficits and accumulation of debt—is by a large margin the most risky fiscal strategy in American history. In his Feb. 1 budget message, Mr. Obama said, “We cannot continue to borrow against our children’s future.” But that is exactly what he proposes to do.

He projects a cumulative deficit of $11.5 trillion by 2020. That brings the publicly held debt (excluding debt held inside the government, e.g., Social Security) to 77% of GDP, and the gross debt to over 100%. Presidents Reagan and George W. Bush each ended their terms at about 40%.


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