Rising Deficit, Rising Fears
The encroaching tax season may not spoil the holiday cheer of the well-to-do as much as in past years, since Congress has generously speeded up tax cuts on earned income and capital gains for 2003. But can the country afford them when the total national debt has just breached $7 trillion and is on course to increase $5 trillion more in the next 10 years? Increasingly, the answer around the world is “No.”
The Congressional Budget Office and nonpartisan groups like the Concord Coalition have long warned of the consequences, to interest rates and investment, of the soaring deficit. The new Cassandra is the International Monetary Fund, warning that the growing trillions of U.S. debt jeopardize global financial stability.
Though the tax-cut and spending spree of the last few years may have temporarily juiced up the U.S. economy, it will exact a price in later stagnation. U.S. financial obligations to other countries are reaching “an unprecedented level of external debt for a large industrial economy,” according to the IMF report. One cause of that indebtedness is last year’s record trade deficit of $491 billion, after 2002’s already high $418 billion. The trade imbalance also helps explain the loss of millions of decently paying U.S. manufacturing jobs.
As the trade deficit grows, other nations are essentially financing more U.S. debt. But the more the U.S. borrows, the greater the pressure on global interest rates. European countries like Germany and France, though not running American-size deficits, must compete with the U.S. to attract funds to finance their debt. The higher U.S. rates go, the more other debtors suffer.
As some 77 million baby boomers begin to retire this decade, the IMF report sees U.S. Social Security and Medicare headed tens of trillions of dollars into the red and correctly observes that no pro-growth strategy can make up such shortages. The cost of paying interest on the national debt itself deprives the Treasury of funds: Last year, the nation’s collective debt bill was $322 billion, 18% of federal revenue. Federal Reserve Gov. Donald Kohn said Wednesday that if the deficit isn’t reduced, interest rates will go up and “we will have slower growth in the capital stock and in the number of houses and autos” purchased.
Treasury Secretary John W. Snow, however, said Wednesday that the administration still intends to make permanent tax cuts the “very center” of its fiscal policy while slashing the “entirely manageable” deficit in half over the next five years. Snow maintains that sufficient spending cuts can be enacted to do so. But given Congress’ enactment of increases in permanent, nondiscretionary programs like the new Medicare drug benefit, serious spending cuts are an illusion.
The administration inherited a slowing economy that needed pumping up with spending and short-term tax cuts. But the more it enshrines cuts permanently, the greater the risk of a fiscal meltdown at home and now, it seems, abroad.
