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McClaughry: The Coming Fiscal Storm

08/18/10 5:55PM By John McClaughry
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(HOST) Commentator John McClaughry believes that federal deficit spending today will be the fiscal storm of tomorrow - and that it's high time we faced up to it.  

(MCCLAUGHRY)   George Washington once observed that "We should avoid ungenerously throwing upon posterity the burdens that we ourselves ought to bear." The fiscal facts contained in the Congressional Budget Office's long-term budget outlook, released last month, would leave the normally unflappable Washington appalled.

Just to set the stage: we have an accumulated federal budget debt approaching  $15 trillion. That's staggering, but it's small compared to the additional $47 trillion in unfunded liabilities for benefit programs, notably social security and Medicare.

The respected and nonpartisan CBO presents two scenarios. The one it considers most realistic assumes that most of the Bush tax rate cuts will continue, taxpayer resistance will block ever more "soak the rich" schemes, the Medicare doctors and hospitals will get paid quite a bit more, and the outcry over Medicare "death panels" will block those expected savings.

By 2035, under this scenario, federal spending would account for almost a third of the U.S. economy, and federal debt held by the public will have risen from the present 60% of GDP to an astounding 185%.

But wait! It gets worse. When the government pays its bills by borrowing, the funds it borrows "crowd out" productive private investment. CBO projected that federal debt would increase to 188% of GDP by 2027.

And don't forget the tax dollars required to pay the interest on federal debt. At the present $15 trillion debt level and 3% average yield, we'll pay over $400 billion next year to service the debt. That annual burden will triple by 2027.

David Walker served for ten years as the U.S. Comptroller General. There is probably no one person in the country who has a better grip on what these fiscal facts mean for Americans, especially the younger generations.

In his new book Comeback America, Walker writes "If we don't wake up, the next crisis could be much worse. What if we went into it with even greater budget and current accounts deficits? These measures [interest rate cuts, bailouts, stimulus spending] worked this time because the world still trusts in the strength of the dollar and the safety of U.S. bonds. But what if trust in the United States erodes? In that dismal event, our economy would face skyrocketing interest rates at best, and at worst a flight from the dollar to the euro or the yen. If that happens, farewell to America as the world's economic powerhouse."

David Walker will speak at a program at the Sheraton Burlington, tomorrow from 9-noon. His topic is the subtitle to his book: "Turning the Country Around and Restoring Fiscal Responsibility". Vermonters concerned about the fiscal storm facing their children and grandchildren in the years ahead may want to attend.
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