Government

Your taxes are going up/your benefits are going down 😡deficits, debt, interest payments …

The following is taken from the CBO report released April 9, 2018.

It should be sobering. It should tell you that pie in the sky new spending can’t be paid for. It should tell you government revenue is woefully inadequate to support the spending we have committed to. It should tell you we are “wasting” nearly one-half a trillion dollars a year in interest payments and rising.

It should tell you that every politician left and right is a fool and treats you like one.

In a few years Social Security will not be able to pay full promised benefits because revenues are insufficient. In a few years the Medicare hospital trust will not be able to pay its bills because revenues are insufficient.

Add to this mess the fiscal status of many states due in large part to unaffordable promises made to public employees and we are headed to the perfect fiscal storm leaving only two alternatives: reduce the obligations created or increase the tax revenue (on all Americans).

If you are solid middle-class or above, it may be a good time to think Roth and other tax-free investments. 🤑

Outlays

In CBO’s projections, outlays for the next three years remain near 21 percent of GDP, which is higher than their average of 20.3 percent over the past 50 years. After that, outlays grow more quickly than the economy does, reaching 23.3 percent of GDP (adjusted to exclude shifts in timing) by 2028.

That increase reflects significant growth in mandatory spending—mainly because the aging of the population and rising health care costs per beneficiary are projected to increase spending for Social Security and Medicare, among other programs. It also reflects significant growth in interest costs, which are projected to grow more quickly than any other major component of the budget, the result of rising interest rates and mounting debt. By 2028, net outlays for interest are projected to be roughly triple what they are this year in nominal terms and roughly double when measured as a percentage of GDP. In contrast, discretionary spending in the projections declines in relation to the size of the economy.

Deficits Are Projected to Be Larger Than CBO Previously Estimated

The deficit that CBO now estimates for 2018 is $242 billion larger than the one that it projected for that year in June 2017. Accounting for most of that difference is a $194 billion reduction in projected revenues, mainly because the 2017 tax act is expected to reduce collections of individual and corporate income taxes.

For the 2018–2027 period, CBO now projects a cumulative deficit that is $1.6 trillion larger than the $10.1 trillion that the agency anticipated in June. Projected revenues are lower by $1.0 trillion, and projected outlays are higher by $0.5 trillion.

Laws enacted since June 2017—above all, the three mentioned above—are estimated to make deficits $2.7 trillion larger than previously projected between 2018 and 2027, an effect that results from reducing revenues by $1.7 trillion (or 4 percent) and increasing outlays by $1.0 trillion (or 2 percent). The reduction in projected revenues stems primarily from the lower individual income tax rates that the tax act has put in place for much of the period. Projected outlays are higher mostly because the other two pieces of legislation will increase discretionary spending. Those revenue reductions and spending increases would result in larger deficits and thus in higher interest costs than CBO previously projected.

Debt Held by the Public Is Projected to Approach 100 Percent of GDP

As deficits accumulate in CBO’s projections, debt held by the public rises from 78 percent of GDP (or $16 trillion) at the end of 2018 to 96 percent of GDP (or $29 trillion) by 2028. That percentage would be the largest since 1946 and well more than twice the average over the past five decades (see figure below).

Such high and rising debt would have serious negative conseqduences for the budget and the nation:

• Federal spending on interest payments on that debt would increase substantially, especially because interest rates are projected to rise over the next few years.

• Because federal borrowing reduces total saving in the economy over time, the nation’s capital stock would ultimately be smaller, and productivity and total wages would be lower.

• Lawmakers would have less flexibility to use tax and spending policies to respond to unexpected challenges.

• The likelihood of a fiscal crisis in the United States would increase. There would be a greater risk that investors would become unwilling to finance the government’s borrowing unless they were compensated with very high interest rates; if that happened, interest rates on federal debt would rise suddenly and sharply.

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3 replies »

  1. It appears fairly clear what Congress will eventually do: increase the payroll Social Security tax, increase the Medicare tax, remove the ceiling on income subject to payroll taxes, increase the age to be eligible to draw Social Security benefits and finally “means test” high income retirees. Like a carburetor starved for air, the economy will sputter, cough, and eventually stall. After years of a slow recovery, politicians will take credit for getting America going again.

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      • RD – Social Security has always been and will always be a welfare program. It is a wealth transfer system – taking taxes from the working class and transferring it to retirees. No one that is now retired paid anything close in taxes, to pay for, what will be received in lifetime family benefits. And since not enough is paid in Social Security taxes to cover what each family will receive in future benefits, the system will never be balanced. The government will just borrow the needed funds and continue to pay the interest on the debt, until it crashes the economy. I am sure me and you will not be here to see it.

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