What’s After The Fiscal Cliff?

At this time it looks as though we will avoid the fiscal cliff with an agreement that may lead to about one trillion dollars in new revenues and about the same in reduced expenditures over a ten year period. If this occurs and we see modest increases in new revenues due to economic growth from the current two percent GDP growth to 3-4 percent over the next several years, it will still take until 2015-2016 at best to achieve near balance in yearly federal budgets.

After the financial crash in 2007-2008 we managed a $1.5 trillion deficit budget in the last year of the Bush administration. With jobs being lost at a rapid rate as the Obama administration began, tax revenues declined in 2009 and remained lower in 2010 as federal budget deficits declined further to about $1.7 trillion each year. In 2011 deficits declined to $1.1 trillion, and to $ 700 billion in 2012. In these latter two years, improved budget deficits were due to both cuts in expenditures as well as to increases in tax receipts. Net job losses had declined and increasing numbers of new jobs were being reported. Unemployment had declined from over 10 percent to near eight percent or under eight percent.

With an agreement on the fiscal cliff at the level noted above we may see deficits for 2013 drop to about 500 billion. If business confidence in the economy improves even slowly, large business profits are likely to be gradually converted into new jobs and and we may cautiously conclude that we will run lower deficits by about 100 billion per year in each year for the next several years. These could be improved if further cuts in expenditures are made and such deficit cuts are not offset by job cuts. That would, of course, lead to offsetting losses in tax revenues associated with those job cuts. Thus, it’s quite possible that by 3-4 years past 2013 yearly budgets will come into balance.

Accumulated national debt is not at about 16 trillion and for the first time ever has exceeded the gross national product (GNP).  In 4-5 years of additional deficit budgets in the  range of those noted above, we will reach a net national debt of about $17 trillion. However, if economic growth achieves 3-4 percent over most of the next several years, then GNP should once again exceed net national debt, but just by a bit. If we were to thereafter achieve revenues that exceeded expenditures by about one trillion dollars a year, we would need 16-17 years to retire the federal debt.

Clearly, even if we maintain a schedule which eliminates yearly deficits by 2016 the early years after that will be critical if we are to begin to pay down the debt, even if we cannot do it at the rapid rate suggested above. Another critical matter will be to pay interest in the debt before paying off principal.  Current interest payments are about $250 billion per year. After an additional four years rates could go up further as they have in Europe for Eurozone democracies whose debts have also exceeded their GNP.

In the last several years the Federal Reserve Bank has purchased U.S. bonds in significant quantity and this has driven down interest on those bonds. This program known as Quantitative Easing has been helpful in minimizing interest payments, but cannot continue forever. If we can see our way through until 2016 and achieve near balanced yearly federal budgets, we have a change, but if at any point in the next 5-10 years past 2016 interest rates on debt begin to soar upward, we will have great difficulty in retiring the debt without significant pain for the nation.

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4 responses to “What’s After The Fiscal Cliff?

  1. Yes, this is basically a math problem with variables that are somewhat uncontrollable. One can calculate various scenarios, but like any system this is only a model of the real world. It would be interesting to look at modeling that is being done in this area and understanding those probabilities of outcomes, and assumptions made. Unfortunately, in the popular press there is no real discussion of the “math” because it is difficult to understand for some people.

  2. Yes–math is involved. But the basic point is that we may be able to get back to balanced yearly budgets in 4-5 years, but after that it is likely to take us over 20 years to pay off accumulated debt. We can only pay off total accumulated debt if interest rates on borrowed money remain low. If interest rates suddenly climb, we may never be able to pay off the accumulated debt.

  3. Transparency in spending could cure many woes we are experiencing. The cost of everything is so over blown, we should be demanding answers. What a slap in the face it is to the people, to expect us to believe these expenditures.
    We aren’t getting value for our dollars. We are paying for clean ups left by corporations, the list is never-ending. With all our resources, we should hardly be hurting.
    Privatizing things only lets the government off the hook for taking responsibilities for things they should. Things are more wrong than right. I don’t even want to get started with why we are even paying interest or ‘borrowing’ money. blah!

  4. You are, of course, quite correct in everything you say. I’ve looked at the way we spend money in some other posts, including the unconscionable lack of responsibility or legislated built charges that industries should pay to offset their fouling the environment. The economy is broken and likely cannot be fixed before the whole financial system comes crashing down around us (most likely before 2020).

    What I tried to show in this blog post was that debt is at such a level that we cannot pay the bill no matter what is done by the Federal Reserve Bank or the government. the consumer based economic system has likely come to an end and one is not prescient enough to really see where we go from here.

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