I’ve posted several times on this blog about the ridiculous levels of debt, both private and public, in our society. Many people are expressing optimism that the new Congress will “get serious” about addressing the problem at the level of the federal government. After all, the new leadership in the House of Representatives is talking tough about cutting $50 billion from the current fiscal year’s budget, right?
Unfortunately, $50 billion is a drop in the bucket compared to annual deficits of over $1 trillion and an overall debt of $13 trillion or more. To get an idea of what it will take to balance the federal budget, you have to wake up and smell the coffee.
If the budget is to be balanced, it’s going to have to come mostly from spending cuts, not increased taxes. Today the federal budget accounts for an historically outsized percentage of the economy, about 25% (the historic average over the last few decades is around 20%, and when we had balanced budgets on a technicality in the late 1990s, it was about 18%). Federal tax revenues are around 16% of GDP now. For anyone who thinks that taxing rich people can make up that difference, please realize that there simply aren’t enough of them to get anywhere close to those numbers. And if you start taxing them at punitive rates, they will leave for greener pastures around the world like Panama, Ecuador, Argentina, and Thailand.
Here is one proposal for balancing the federal budget by 2020. It includes cutting over $1 trillion annually from current levels of spending. Here are some line items:
- $150 billion from defense
- $94 billion from the Department of Education (the whole department)
- $53 billion from HUD (the whole department)
- $190 billion from Medicaid (by converting it to a block grant to the states and freezing spending)
- $28 billion from farm subsidies
And the list goes on. Everyone’s ox will have to be gored at all income levels and from all partisan stripes. On the plus side, the government would stop sucking up all the available capital in the world to finance its deficit. (Did you know that the current deficit is about double the amount of all domestic annual savings?) We might see some sustainable investments developing and a restoration of real interest rates to help us determine which ones make sense and which ones don’t. And we’d be able to start freeing ourselves from debt bondage to Asians.
Scary stuff. Are you preparing for the inevitable austerity that is coming in one form or another? It’s going to have to be a return to recession as we adjust to spending cuts or (more likely) an inflationary environment if the feds try to print their way out of the debt obligations. What’s your savings rate? Do you have an emergency fund? Is a percentage of your wealth in hard assets? Are you carrying a lot of debt? Is your job vulnerable to another round of cost cutting? Address these concerns today, not when the storm hits.