US fiscal policy moved back into the spotlight with President Barack Obama presenting his fiscal strategy to Congress.
From one perspective, the budget outlook makes disconcerting reading. The budget deficit goes from just under $US1 trillion in fiscal year 2013 down to $US744 billion in 2014, $US576 billion in 2015, $US528 billion in 2016 and then it stays at $US500 billion, plus or minus a few tens of billions of dollars, right through to 2023.
There is not a hint of a balanced budget over the next decade. As a share of GDP, the budget deficit falls from 6 per cent in 2013 then eases progressively to 2.4 per cent by 2017. It is then expected to stay around 2 per cent through to 2023. With the economy projected to grow solidly over the next decade, the debt to GDP ratio is forecast to peak at 78.2 per cent of GDP in 2014 and 2015 before edging back to 73.0 per cent of GDP by 2023
Clearly, the path to full fiscal repair in the US is a long one.
Obama’s budget proposals, which include what can only be described as modest tax increases based on changes to the tax deductible allowances for high-income earners and an additional cigarette tax, will need Congressional approval. On the spending side, there are savings from the wars in Iraq and Afghanistan being scaled back, while there are also cuts to the program that provided subsides for the cost of heating for low-income earners among other things.
Despite the fact that federal government spending as a share of GDP is projected to fall from 22.8 per cent in 2012 to a low point of 21.2 per cent of GDP in 2018, the Republicans have already indicated that they will not abide by the tax increases proposed by Obama.
The speaker of the House of Representatives, ultra conservative John Boehner, indicated that Obama should proceed with the “incremental entitlement reforms” which involved a steady wind back of social securities payments over the medium-term adding, “the president got his tax hikes in January, we don’t need to be raising taxes on the American people”.
President Obama dismissed this posturing noting “when it comes to deficit reduction, I’ve already met Republicans more than half way. So in coming weeks I hope Republicans will come forward and demonstrate that they are really as serious about deficits and debt as they claim.”
According to Obama’s budget proposal, total government receipts rise from 15.8 per cent of GDP in 2012 to 20 per cent of GDP in 2023, although it should be noted that the bulk of this increase is due to the revenue benefits that flow from sustained economic growth with little hard cash coming from the proposed tax increases.
Given the extent of the fiscal and government debt concerns in the US, a problem that saw ratings agency Standard & Poor's downgrade the US credit rating in 2011, it is disconcerting that there is no balanced budget projected over the next decade. It is clear both sides of politics would probably like to have a balanced budget, but the stand-off between Republicans wanting to get there only via spending cuts and Obama and the Democrats wanting to use some revenue measures, means that little will be done.
The structural budget deficits and persistent high level of government debt that are entrenched in the latest budget numbers could present a problem. The budget projections are heavily dependent on the economy continuing to grow. To that end, the economic forecasts are for real GDP growth to accelerate from 2 per cent in 2012 to 2.6 per cent in 2013 and then lift to around 3.5 per cent each year out to 2017. Even with these rosy forecasts, the unemployment rate is projected to stay above 6 per cent right through to 2017 when it dips to 5.7 per cent.
Quite clearly, any downside shocks to this economic outlook would undermine revenue, increase spending and disrupt the path of deficit reduction and debt stabilisation.
For now, the markets seem content with the US budget, although it must be said, other news dominated sentiment. US stocks are at a fresh record high, the bond market is calm with 10-year yields well entrenched below 2 per cent and the US dollar remains stuck in a narrow range.
It is to be hoped that the US fiscal issues remain this low key over the decade ahead, but I have a feeling there is still a problem that will show up one day.