Home > Fiscal Policy, Government Deficit, Taxation > The Fiscal Cliff and Reality

The Fiscal Cliff and Reality

The recently-completed budget deal was yet another exercise in delusion. The President claimed to be asking for additional tax revenue of $1.6 Trillion. Sounds like a big number doesn’t it? Well that is the revenue over a ten year period so it is useful to ask how $160 Billion per year stacks up against our monthly budget deficit. The comparison is startling.

Below you will find some deficit numbers obtained from the Financial Management Service, a bureau of the Treasury Department (www.fms.treasury.gov).  These numbers are remarkable.

Fiscal Year 2011                                              Fiscal Year 2012

October 2010: $98.5 Billion                       October 2011: $120 Billion

November 2010: $137.3 Billion                 November 2011: $172.1 Billion

The federal government operates on a fiscal year that begins in October, ending in September of the next year. So in the data above, we are looking at the first two months of the last two fiscal years. For the entire 2011 fiscal year, the deficit totaled $1.1 Trillion. Notice first how large the deficit is in each month. More startling is the fact that the deficit is accelerating in size. If the first two months of the 2012 fiscal year are translated into annual totals, the annual deficit would be $1.75 Trillion! And this acceleration should be expected to continue as Obamacare is implemented and more baby boomers collect Social Security and are covered by Medicare. These numbers make clear how serious the situation has become. No economist can predict the future but it seems safe to say that the government’s fiscal problems are staggering in size and unsustainable.

President Obama’s $1.6 Trillion demand for additional revenue is obviously trivial. The government’s deficit dwarfs any additional tax increases brought in by the latest budget deal. The debt ceiling discussion will reveal if there is any hope of avoiding a debt crisis. My guess is that the denial of reality will continue. I hope I am wrong.

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  1. John Seater
    January 4, 2013 at 6:16 PM

    Here are some numbers on federal expenditures for fiscal 2011:

    Total outlays $3.60 trillion.

    National defense $0.71 trillion
    Social Security $0.78 trillion
    Medicare $0.49 trillion
    Other health care $0.37 trillion
    Income security $0.60 trillion
    Everything else $0.65 trillion

    Budget deficit $1.30 trillion

    If national defense were set to zero (obviously ridiculous, but go with it for the sake of the argument), there still would be an annual deficit of $0.59 trillion. A realistic cut in defense may be as much as 20%, which would be $0.14 trillion, leaving a deficit of $1.16 trillion.

    There is no reasonable way to raise taxes enough to cover such a large deficit. Total revenue was $2.3 trillion. Taxes would have to be increased by 50% to cover the deficit if only defense is cut by 20% (which itself seems unrealistically large to me).

    There is no escaping the conclusion that social spending must be cut and cut by a lot. It gets worse because that conclusion is based on the numbers only for 2011, whereas we know that Social Security, Medicare, and Medicaid spending all will increase substantially in the next few years as the baby boomers retire in huge numbers.

    So whose programs will get cut? Nobody wants to be first in line. I can’t see any politician taking the lead on cutting somebody’s program, so I predict nothing will be done to address the fundamental problem and the US in a few years will be in the position that Greece, Italy, Spain, and all the other European countries are in now.

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