The U.S. budget picture is improving. Earlier this week we found out the deficit shrunk in December by $80 billion vs. a year ago.
Overall, the federal deficit for the first quarter of the fiscal year shrunk to $371 billion, compared to $388 billion in the first quarter of fiscal 2010.
Before we start celebrating, economists still forecast another $1 trillion deficit this fiscal year.
The budget shortfall is likely to come to a head this spring when Congress has to vote on raising the debt ceiling. After “shellacking” the Dems in November, many Republicans say they won’t agree to raising the debt ceiling until they see some spending cuts.
Treasury Secretary Tim Geithner wrote to Congress in early January, warning a lack of compromise could lead to a U.S. debt default with “catastrophic” results for the economy. (See: Real “Showdown” Coming Over U.S. Debt Ceiling … or Just More Political theatre?)
“This is playing with dynamite,” former Senator Ted Kaufman (D-DE) tells Aaron and Henry in this clip.
Kaufman firmly believes Congress needs to “put everything on the table,” which means cutting spending AND raising taxes. The problem, he says, is making tough fiscal decisions is a surefire way to put your re-election in jeopardy. For many politicians, “it’s daunting to get involved in this in any other way except a superficial way,” he argues.
The last two Presidents to run budget surpluses did it by raising taxes and were punished for it, Kaufman recalls. President George H.W. Bush raised taxes after his famous (or infamous) “read my lips, no new taxes” campaign pledge. The result: He was a one-term President. His successor President Bill Clinton also raised taxes. That move gave birth to Newt Gingrich’s “Republican Revolution,” which captured both houses of Congress in 1994.
The other difficulty is cuts in discretionary spending, no mater how great, will do very little to shrink the deficit. “The vast majority of the deficit is being created by Medicare, Medicaid and Social Security, and defence,” Kaufman says. (See: U.S. Deficit Is a National Security Issue, defence Expert Says: “We Can Defend the Country Better for Less)
If politicians continue to avoid touching the “third rail” of politics, we’ll never meaningfully cut the deficit. Eventually, something’s got to give. If not, debt as a percentage of GDP will become unsustainable and America really will become like Europe’s so-called PIIGS.