Photo: General Accounting Office
The entity responsible for certifying the financial statements of the U.S. government, the Government Accountability Office (GAO), has released its fiscal 2011 annual report.When companies and governments have bad news to release, they try to release it at the moment when journalists and the public are paying the least amount of attention — thus, hopefully, generating the least possible amount of grumbling and complaints.
So it’s no surprise that the Treasury released its 2011 report on the Friday before Christmas, possibly the day of the year on which the country was paying the least amount of attention.
As you might expect, the annual report contains tons of bad news.
The country can print its own money, so it’s not “broke” in the classic sense of the word (can’t pay its debts, can’t fund its operations).
But the country is also clearly on an unsustainable course.
We will highlight sections of the report over the coming days.
For now, here are the highlights:
- The U.S. ran a $1.3 trillion budget deficit in 2011, flat with 2010 and the third year in a row of deficits over $1.3 trillion
- The U.S. federal debt load continues to climb as a percentage of GDP and is expected to explode over the next few decades
- The big problem in our current and future finances is NOT spending on defence, Education, the Environment, and the other government programs that Democrats and Republicans love to fight about.
- The big problem in our budget is a combination of:Taxes that are currently off their peak as a percentage of GDP Future unfunded commitments to Medicare and Social Security
- Taxes that are currently off their peak as a percentage of GDP
- Future unfunded commitments to Medicare and Social Security
To be perfectly clear: The amount of the “unfunded liability” for our Social Insurance programs (Medicare and Social Security) is now $34 Trillion. This is an increase of $3 Trillion from last year. This number has increased at about $1.7 Trillion per year for the past 10 years. If not for some absurd assumptions about how Congress is going to eventually chop the cost of Medicare (the so-called “doc-fix” that pays doctors more for Medicare procedures that Congress passes every year), the liability would be $46 Trillion.
So, what’s the implication and solution?
Over the long haul, the intelligent solution is a combination of modestly higher taxes and reductions in Medicare and Social Security benefits.
The other option is bankruptcy.
First, the budget deficit. In 2011, a year in which the economy continued to recover from the financial crisis, the federal budget deficit (white bars) stayed flat at $1.3 trillion. That's up almost $1 trillion from five years ago.
Where's the government revenue coming from? Mainly personal taxes. Corporate taxes and other revenue help, too. But revenues are still down significantly from four years ago.
Where's that spending going? Mostly to two things: Social Security and Medicare. defence is huge, too. And Interest on our debt is growing. The rest, taken individually, is peanuts.
So, what about the future? Well, in the next few years, ignoring interest payments (which, in the real world, we obviously can't ignore), the gap between revenue and spending is expected to close miraculously. (We'll believe it when we see it.) But, then, thanks to the Social Insurance programs, we'll go into deficit again.
As you can see, the bulk of that spending is Medicare and Social Security. And, put together, it is a lot more than we are expecting to take in. And the projections assume that our spending will miraculously tank in the next couple of years while tax revenue climbs.
And, of course, this is the real world, so we can't just ignore interest payments. So this is what the projections look like for real.
So what are these exploding deficits going to do to our debt load? They will make today's $15 trillion look like a rounding error.
So, what's the answer? Well, the intelligent answer is a modest increase in tax revenue, which is currently down from its peak as a percentage of GDP, and significant reductions in Social Insurance spending. The dumb answer is to stuff our heads in the sand and ignore the problem.
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