June 2013

Is the Fiscal Crisis Over?

by John Hendrickson

A false sense of optimism has struck policymakers as the Congressional Budget Office (CBO) recently projected that in 2013 the federal government will only run a $642 billion deficit instead of the annual trillion dollar deficits that marked the previous fiscal years.[1] The lower deficit, combined with the optimistic view that the unemployment rate is getting lower, has resulted in some policymakers and market analysts rejoicing that full economic recovery is just around the corner. The fact remains that this economic optimism is false. The 2013 deficit and the unemployment rate (7.6 percent) may be lower, but serious structural problems remain in the economy.

For example, the $642 billion deficit is on top of the trillion dollar deficits of the previous years. The escalating national debt of close to $17 trillion does not even include the costs of unfunded mandates from entitlement programs such as Social Security and Medicare. It should be noted that Keynesians are also concerned about the smaller deficit, not because spending less is better, but because they believe more spending or “investments” will lead to economic growth. In addition, the unemployment rate may be “officially” declining, but the numbers of people who have either given up looking for work or are underemployed are not taken into consideration. In fact the number of individuals requiring governmental assistance such as food stamps or disability continues to increase.

Economic policy uncertainty also remains as the private sector is waiting for the impact of regulations, tax increases, and the implementation of the Patient Protection and Affordable Care Act. The Affordable Care Act is a major aspect of the policy uncertainty that confronts the economy. The new health care entitlement will not only cost taxpayers a significant sum of money, but will burden them with tax increases. Christopher Jacobs, a Senior Policy Analyst with The Heritage Foundation, noted:

Obamacare contains no fewer than 18 tax increases, including new taxes on medical devices, insurers, and pharmaceutical companies, to name a few. According to the most recent estimates, those tax increases will raise revenue by at least $1 trillion over the next 10 years — followed by higher sums in future decades. Moreover, 12 of 20 tax increases will affect middle-class families, directly violating [President] Barack Obama’s ‘firm pledge’ to families making under $250,000 per year that he would not raise ‘any of your taxes.’[2]

President Obama’s budget also does not address the fiscal crisis. The current budget proposal by President Obama “never balances and reports growing spending from $3.6 trillion in 2013 to nearly $5.6 trillion in 2023, while maintaining debt at an economically risky 76 percent of gross domestic product (GDP).”[3] Curtis S. Dubay, a Senior Policy Analyst with The Heritage Foundation, wrote that “President Obama’s budget includes tax increases that total $1.103 trillion over the 10 years from 2014 to 2023.”[4]

The current policy climate as well as the general economic outlook is still very uncertain and it is too early to embrace optimism. The alternative budget proposal, “The Path to Prosperity,” which was authored by Representative Paul Ryan (R-WI), who chairs the House Budget Committee, actually would provide for a more fiscally sound economy and policy stability. John F. Cogan and John B. Taylor, both policy scholars at the Hoover Institution, described the economic impact of the “Path to Prosperity” budget:

According to our research, the spending restraint and balanced-budget parts of the House Budget Committee plan would boost the economy immediately. With the Budget Committee’s proposed tax reform included, the immediate impact would be even larger. The entire plan would raise gross domestic product by one percentage point in 2014, equivalent to about a $1,500 increase for each U.S. household. Ten years from now, at the end of the official budget horizon, we estimate that the entire plan would raise GDP by three percentage points, or more than $4,000 for each U.S. household.[5]

“The Path to Prosperity” provides a policy solution to both the slow economic growth and the fiscal crisis by implementing spending restraint and tax reform, and bringing reform to entitlement programs to save them for future generations. This is the complete opposite of President Obama’s budget proposal.

The reality is that the economy continues to be weighed down by the Great Recession and the fiscal crisis remains. The only solution to resolve unemployment, restore the fiscal credibility of the federal government, and create economic growth is to implement sound ideas that will create stability. These are not based upon big government ideas, but rather limited-government policies based upon reducing spending, low tax rates, limited regulation, and a strong dollar. Until these policies are implemented the fiscal crisis and slow economic growth will continue.

John R. Hendrickson is a Research Analyst at Public Interest Institute.

The views expressed herein are those of the author and not necessarily those of Public Interest Institute or Tax Education Foundation. They are brought to you in the interest of a better-informed citizenry.

[1] Robert Samuelson, “The $642 billion excuse,” Real Clear Politics, May 17, 2013, <http://www.realclearpolitics.com/articles/2013/05/17/the_642_billion_excuse_118456.html> accessed on May 17, 2013.

[2] Christopher Jacobs, “The Taxman Cometh: The IRS’s Role in Implementing Obamacare,” Issue Brief #3941, May 16, 2013, The Heritage Foundation, <http://www.heritage.org/research/reports/2013/05/taxes-and-health-care-law-the-irs-s-role-in-implementing-obamacare> accessed on May 17, 2013.

[3] The Heritage Foundation, “President Obama’s 2014 Budget: A Second-Term Vision for Economic Decline,” Backgrounder No. 2794, May 16, 2013, <http://www.heritage.org/research/reports/2013/05/president-obamas-2014-budget-a-second-term-vision-for-economic-decline> accessed on May 17, 2013.

[4] Curtis S. Dubay, “Net Tax Increases in Obama’s Budget over $1 Trillion,” Issue Brief #3940, May 16, 2013, The Heritage Foundation, <http://www.heritage.org/research/reports/2013/05/net-tax-increase-in-obamas-budget-over-1-trillion> accessed on May 17, 2013.

[5] John F. Cogan and John B. Taylor, “How the House Budget Would Boost the Economy,” The Wall Street Journal, March 18, 2013, <http://online.wsj.com/article/SB10001424127887324532004578362603354690818.html> accessed on May 17, 2013.