New budget deal in Congress: Is it better than nothing?

President Obama and leaders in Congress reached a Federal budget deal that extends spending and tax policy until 2017. After the next presidential election.

Budget battle.
Congress vs. White House: The Federal budget battle looms again. (CC 2.0)

WASHINGTON, Oct. 28, 2015 − President Obama and leaders in both houses of Congress have reached a deal on the federal budget that extends spending and tax policy until 2017 − after the next presidential election. While the Democrats and Republicans say that they have made compromises in order to avoid a potential government shutdown, they argue that something is better than nothing. But is it?

The deal increases government spending by $80 billion over the next two years, does nothing to reform tax policies and funds that $80 billion increase through reductions in spending for the Social Security disability fund and Medicare while raising revenue by selling some government assets.

The deal also suspends the ceiling on the debt, which is akin to giving someone a credit card with no upper spending limit. While in theory, Congress is supposed to control government spending, the reality is that over the next two years, this deal will add about $1 trillion to the current $18 trillion public debt.

The size of the debt doesn’t seem to be a concern to our elected leaders. But it should be.

Essentially, the public debt in this country will have increased by about 80 percent under President Obama. In 2017, the federal debt will be almost $19 trillion. By way of contrast, all other presidents before Obama put together had accumulated less than $11 trillion in debt.

Why is the public debt a problem?

Although American voters do not appear to be concerned about the extraordinarily high level of federal debt, that’s primarily because they don’t feel any direct effect from it, at least currently. But this increasingly heavy burden will eventually be felt by our children and grandchildren. It is they who will also have to carry the growing burden of our under-funded Social Security and Medicare entitlements.

Right now, the average interest rate the government pays on its mountain of debt is about 2.5 percent. Historically, the average rate for carrying this kind of debt is about 5 percent. In the near future when interest rates return to normal, the 5 percent rate on our projected $19 trillion federal debt load will result in interest payments approaching $1 trillion. This represents about 25 percent of all federal government spending at current levels.

In order to pay the interest and to pay for other government spending, taxes will have to rise, which will put a drag on the economy, continuing the pernicious stagnation the U.S. economy has experienced for the past six years since the Great Recession officially ended. Couple this with the increase in the Social Security and Medicare taxes that will be needed to fund shortfalls in those entitlement programs, and our offspring will be loaded with an unbearable tax burden.

Worse yet, there is no mechanism in place to ever repay any of the debt. When the government incurs an annual deficit, long term bonds are sold to finance it. The government pays interest only on those bonds every year. At the end of 20 years, when the bonds mature, the government simply sells new bonds to repay the maturing bonds. This rolling over of the debt means that the total is constantly increasing, unless there is a rare budget surplus − something has occurred just three times in the last 54 years.

Some economists will argue that the debt is really not that large. They note that in 1946 the public debt was 150 percent of annual GDP. Today the public debt is just over 100 percent of GDP. The problem with that logic is that once World War II ended, government spending decreased dramatically,to a point where, within a few years, the federal budget was balanced so the public debt did not increase.

Based on what’s been happening with government spending since 2009 and based on the budget deal reached yesterday, there is no possible way that government spending can significantly decrease. This means that annual deficits will continue and the public debt will continue to grow. For that reason, the comparison to 1946 is meaningless.

Once again, the people we elected to represent our interests have kicked the can down the road. In 2017, when the current budget deal expires, we will have a new president. If the Republicans win and control both houses of Congress, meaningful government spending and tax reform will likely take place. If the Democrats win the presidency and perhaps gain control of the Senate, then the deficit and the public debt will not be a top priority.

But at some point we will have to face our debt problem. The government simply cannot continue to spend more money than it brings in from tax revenue. The government can’t continue to borrow money with no intention of ever paying it back. Perhaps our leaders should have addressed this problem now.

Maybe no budget deal would have been better than the bad deal that is being forced on the American public today. Maybe we should consider the effects on our children before we spend their money and force them to carry our irresponsible burden.

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