Alarm bells went off in Washington DC this week when the Congressional Budget Office (CBO) released its latest estimate of the federal budget deficit. For the fiscal year ending this September 30 Uncle Sam’s budget deficit will top $1 trillion—for the fourth year in a row.

Just to put this number in perspective, if you spent $1 million every single day since the year 1, that’s right, the year 1, $1 million every single day for 2,011 years, you would not yet have spent $1 trillion! To say the least, it’s a very big number and we’ve been racking up trillion deficits for four consecutive years. Read more.

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Another Year… Another Trillion Dollar Deficit

Tue Feb 7, 2012

another-year.pngAlarm bells went off in Washington DC this week when the Congressional Budget Office (CBO) released its latest estimate of the federal budget deficit. For the fiscal year ending this September 30 Uncle Sam’s budget deficit will top $1 trillion—for the fourth year in a row.

Just to put this number in perspective, if you spent $1 million every single day since the year 1, that’s right, the year 1, $1 million every single day for 2,011 years, you would not yet have spent $1 trillion! To say the least, it’s a very big number and we’ve been racking up trillion deficits for four consecutive years.

The little bit of good news in the CBO report is that the deficit as a percentage of the economy, GDP, has fallen slightly to 7%. The bad news is that it’s still higher than any deficit between 1947 and 2008.

CBO uses what it calls a “baseline” budget to forecast that the annual deficit will decline over the next ten years. The problem is that the baseline budget assumes “current law,” i.e., that Congress won’t change existing laws that are projected to reduce spending and raise greater tax revenue.

Almost no one believes that will actually happen because current law includes (1) allowing all of the Bush-era income tax rate cuts to expire at the end of this year; (2) not indexing the Alternative Minimum Tax (AMT) for inflation; and (3) cutting Medicare payment rates for physician services by 27%.

If, as expected, Congress and the President continue the Bush-era across-the-board tax cuts, or at least most of them, extend and index the AMT to prevent millions of taxpayers from falling into the AMT net and postpone the scheduled cuts in Medicare reimbursements for physicians, the so-called “Doc Fix,” all without corresponding offsets elsewhere, these colossal federal budget deficits will persist for years to come.

In that gloomy scenario, annual deficits will pile up on to the total public debt of the U.S.—now clocked at $15 trillion, to 72% of GDP by the end of this year. And CBO further forecasts that if nothing is done to rein in federal budget deficits going forward “Debt held by the public would climb to 94% of GDP in 2022, the highest figure since just after World War II.”

Even under CBO’s rosy scenario, in FY 2012 the U.S. government will spend $3.6 trillion, take in $2.5 trillion, and borrow $1.1 trillion. Put another way, Uncle Sam will borrow about 30 cents of every dollar it spends.

What to do—

In this sharply polarized election year, this is not the place to get into the politics of deficit and public debt reduction. But whoever is elected President and whoever is elected to the U.S. Senate and House of Representatives in November, Democrat or Republican,  must start 2013 with a commitment to work together to get Washington’s fiscal house in order.

To be sure, politically it will be difficult—as we saw last Summer when President Obama and Congress risked a government default in their clash over the President’s proposal to raise the debt ceiling.

And CBO reminds us that “austerity” programs to cut government spending and raise taxes threaten to slow an already-weak economy and increase joblessness.

But surely the alternative, essentially doing nothing, is a worse choice. Sooner or later buyers of U .S.government debt, including foreign governments like China, will either demand higher interest rates or invest their money elsewhere. This is exactly what’s happening now in Europe, as Greece, Italy, Spain, Portugal and Ireland struggle to find buyers for their bonds at competitive interest rates.

Americans have long been known and admired all over the world for our can-do spirit and ability to take on the most demanding challenges. Trillion-dollar annual budget deficits and a $15 trillion-and-rising public debt burden is not only our challenge; unaddressed, it’s a lasting legacy to our children and grandchildren. Let’s hope Washington can muster the courage to respond.