Global Crisis/Innovation Blog

When Will America Declare Bankruptcy?  In 2020 – Or Before

By Shlomo Maital

 

 

Source: MORGAN STANLEY

 The blue line is Revenue as % of GDP;

 The red line is Interest + Entitlements as % of GDP

 A little-noticed report by the Congressional Budget Office (CBO)  (“Long Term Budget Outlook, 6/10”) does the following: It projects revenue as a % of GDP (projected to be stable, at about 20%, mainly because of Republican pressure for tax cuts and no tax hikes),  while two budget components only,  interest payments and ‘entitlements’, will rise from about 10% of GDP today to 20% by 2020, owing to America’s aging and huge debt along with rising interest rates.

  Note:  the CBO is regarded as highly professional and credible. 

  A word of explanation:  Entitlements include federal spending on Social Security, Medicare, Medicaid, based on current legislation.  

     What does this mean?   It means that all tax revenue will be spent on interest payments and entitlements, leaving nothing for discretionary programs (such as defense, education, etc.). 

     At some point, between now and 2020, some American Administration will have to bite the bullet and slash entitlements, regarded politically as a “third rail” (especially Social Security).  But who?  Republicans show no inclination to this, nor does Obama.  With Obama likely to be re-elected in 2012, and his 2nd term ending in 2016,  he will have to deal with this issue during his second term. 

   But will he have the guts?  And will the Republican opposition allow it? 

   The only solution is to raise taxes.  Republicans are ferociously opposed.  But the CBO study suggests there is no alternative.

    Stay tuned.  Without a major policy change, on spending entitlements and taxes, America is bankrupt by 2020. 

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