At 10 percent of the U.S. economy, the federal deficit is larger than at any time since World War II. If that isn’t troubling enough, the outlook over the next decade or two is catastrophic--unless we align what we want government to do with what we are willing to pay. Rep. Paul Ryan has become famous and infamous for his proposal to balance the federal budget over the next decade or so. Many disagree with his proposal, but he has established a framework for discussion.
Because of impossibly large yearly deficits, our national debt is so large it is unsustainable. The lingering effects of a once-in-a-century financial storm are keeping interest rates and the cost of financing the federal debt low. The crisis in Europe teaches us these low rates will not last forever. At some point, investors will become concerned the U.S. cannot finance its debt. If interest rates jump or bond buyers become leery of U. S. credit, our government and economy will suffer serious consequences. Financial vulnerability will increasingly restrict America’s ability to respond to unforeseen challenges, such as natural disasters or international conflict.
The federal debt is currently 70 percent of the economy and expected to rise to 90 percent over the next decade unless Congress intervenes. Last year’s budget agreement takes the debt to 60 percent, but only with large tax increases and mindless across the board spending cuts—the so-called fiscal cliff. Most observers expect Congress to avoid going over the cliff next year. I hope they’re right. This business of putting off a serious agreement on the budget continues to increase the long-term burden of the debt.
The Ryan plan acknowledges that health care costs are out of control. Medicaid for the poor and Medicare for the elderly are virtually unlimited in what they are obligated to spend. These two programs are about 5 percent of the economy now, but are expected to double over the next 25 years. To pay for this, the tax rate for a typical taxpayer would grow from 11 percent to 19 percent. In other words, if America allows health care to continue on its present course, taxes will have to increase 70 percent.
In the meantime, the federal government’s core functions—national defense, justice, diplomacy and transportation—will be squeezed as more resources are devoted to health programs. Unless Congress can agree to a different solution, national defense will be hollowed out over the next decade. Critical transportation infrastructure has been funded the past two years with last minute, short term fixes. Despite the current two-year appropriation, the nation still faces a $2 trillion backlog of infrastructure needs.
Solving the health care riddle could solve much of the long-term budget problem. Whether or not you agree with Congressman Ryan’s specific proposals, citizens of the U.S. must engage in serious conversations about how to significantly slow the relentless increase in health costs and how to scale back the expense of the federal government to sustainable levels. The only alternative is higher taxes or economic catastrophe-- possibly both.