The threat of a government shutdown has been avoided–for now. However, expect the budget and the challenge of debt reduction to stay in the headlines. We may have funding for the next few months, but expect deficit spending to cause the US to hit the debt ceiling of $14.294 trillion by mid-May. At that time we can expect more “sabre-rattling” by Congress. CNN/Money reports that the government will need to borrow more than $700 billion in the period from April 1 to September 30, which is the end of the fiscal year. Thus, we are adding about 10% to this debt each year. The House Budget Chairman Paul Ryan has introduced his own debt reduction plan. President Obama has outlined his. Many others will come from members of Congress. Again, there will be a lot of “sabre-rattling.” Action needed to raise the debt ceiling is mandatory but members of Congress will use this opportunity to protest and highlight their opposition to the growing debt.
Turning the emotions aside, there are some important facts to consider. First, in the past decade since 9-11 we have seen the largest growth in sovereign debt known to mankind. There are certainly many causal factors, but fighting two wars, suffering the “Great Recession” and lower tax receipts are all part of the equation. Second, something must be done with regard to deficit reduction in order for the economy to continue to grow. Consumers have tightened up and now government must do so as well. However, government must do so in a way that the recession does not return. That is called a “balancing act.” Finally, focusing upon only discretionary spending, which accounts for just over one-tenth of the budget, makes for big headlines but it will not eliminate the deficit. To eliminate the deficit, all spending must be on the table plus tax receipts. Which brings up another question. Do we need to completely eliminate the deficit? That is what part of the debate will be all about. One thing for sure, a stronger economy will produce more tax receipts and make the job easier. The largest contributor to the run-up of debt has been the loss of tax receipts due to the recession. Finally we ask the most important question. With another election around the corner, will the politicians keep their eye on the ball long enough to take meaningful action? It will be interesting to see if they just rattle sabres or use the sabres to do the work that was intended of them.