Thursday, October 31, 2013

REVENUES AND THE NEXT FISCAL CLIFF

Image result for BudgetThe next budget battle is beginning to take shape with the Democratic leaders again seeking new revenues to cover expenditures while the GOP counterparts will seek more fiscal responsible spending. The debate seems to be whether to put the burden of DC spending on the taxpayers or put it on the people who actually have the greatest ability to control it, the federal government. There is an expected fiscal cliff that is expected but right now it may not appear to be a major issue. 

The national deficit has dropped dramatically this past year from the previous year. That may appear to be a reason to celebrate but it really is not. The deficit is encompassing more of GDP than the previous year which is a negative sign. The reduction in deficit spending was due in large part to the combination of increased revenues, sequestration and repayment of bailout funds. Much of these funds are a one time transaction which we cannot expect next year which is why Nancy Pelosi is probably trying to offset it with increased taxes. But should the taxpayers bear the burden of decisions made by politicians who may not be acting in the best interest of society?

Lets look at the future potential fiscal cliff. The interest on the debt and the cost of entitlement programs seem to be the largest danger to our fiscal situation. The year 2015 seems to be an inflection point where deficits will sink to only 2% of GDP but will rise again due to policies according to the Congressional Budget Office. The major concern is that the ability to increase taxes and reduce spending may not sufficiently meet the growth of the interest we are paying on our debt and the spending on entitlement programs after 2015. The problem seems to be less about revenue and more about spending which may not be politically tolerable but it is economically accurate. 

The limitation of raising taxes is the negative economic effect that results. Essentially you will have 2 problems instead of 1 with less ability to maneuver. The policies enacted over the past 5 or so years have not been effective at stimulating the economy enough in which job creation is reducing demand for government services at the same time increased revenue and savings enable the Treasury to reduce the debt. Some politicians or their supporters may not agree that there are negative effects of raising taxes but it is empirical fact that when you increase cost to companies, they will offset those with reducing expenditures. The easiest way is to reduce hiring which is why our job market is stagnant. 

The notion that the entity that has the most power to avoid a negative situation should bear the cost and responsibility. The best entity to bear responsibility for the fiscal situation is the members of Congress and the White House. These politicians on both sides need to realize that they cannot do only what is politically easy but also what is necessary. The issue is spending and the need for entitlement reform which both sides agree to some degree that this is needed. It will be hard to stop expanding programs that in theory are helping people but these programs need to be made more efficient. There are free market solutions available if both sides can stop the political rhetoric that blocks real solutions. 

The national debt and yearly deficits are major economic issues. There are areas that can be improved and no area should be treated like it is the holy grail. We cannot sacrifice security nor compassion but we need to find a suitable mix that is within the means of the federal tax revenues.The economy will grow at its best when we can reduce the ratio of debt to GDP. There will be politically tough choices that need to be made on both sides but it will need to be done. There may be areas to increase revenues but the white elephant in the room is spending which can be ignored only for so long.