Budgetary Crisis

In a recent report by the IMF on the United States, the IMF expressed concern over the large deficits and their effects not only on future generations of Americans, but on the world economy. In the IMF Survey from August 18, 2003 (Vol. 32, No. 15, pp. 233-236 "United States poised for recovery"), they note that "Sustained fiscal deficits [will] eventually crowd out investment and erode U.S. productivity growth. They would also tend to boost the already large U.S. current account deficit, further draining global saving and increasing the risk of disorderly exchange market conditions" (p. 235). The report continues to say that "the recent tax package has added to the uncertainty about future tax rates, in part because tax cuts have been phased in and subjected to sunsets. Moreover, [...] the tax cuts are unlikely to boost output in a sustained manner unless their adverse budgetary impact is offset over the medium term" (p. 236). The high U.S. current account deficit, resulting from the fact that, overall, Americans save very little on net, so that any excess spending has to be financed from abroad means that the sustainability of the high deficit relies on foreign attitudes towards the future fiscal solvency of the U.S. If foreign investors, currently made up in large part by Asian central banks, decide that the level of U.S. debt is becoming unsustainable, and decide to stop purchasing U.S. Treasury bonds, the Treasury will have to raise the interest rates on the new bonds, making the sustainability of U.S. debt more questionable and possibly leading into a financial crisis with worldwide implications for economic stability.

This bleak possibility, of course, can still be avoided, but with the baby boomers coming ever closer to retirement, time is running out. To avoid the crisis, the government should be repealing the Bush tax cuts and using some of the money to reduce the national debt and some on immediate government consumption (upgrading infrastructure, for example, would be both stimulative to the economy and needed in the wake of the massive power outage on the East Coast in August). If these measures were undertaken enough to ensure a significant surplus, it would be possible to reduce the size of the national debt. Thus when the baby boomers retire, which would likely push the budget into deficit, there would be enough leeway in which to pay full, or close to full, benefits to baby boomers without having to slash other federal programs. A move in this direction would reduce the chance of a future crisis, would be welcomed by many, I imagine, and would also leave a smaller burden on future generations.

IMF Survey, Volume 32, Number 15 (PDF, 850 KB)

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