US faces grim future without action to curb debt: study

WASHINGTON (AFP) – The US economy is heading down a path of lower living
standards and diminished confidence without action to stem the massive
budget deficit, a group of prominent researchers said Wednesday.

A National Research Council panel said the country faces difficult
choices on tax increases and spending cuts to achieve a more sustainable
fiscal balance.

“The federal government is currently spending far more than it collects
in revenues, and if current policies are continued, will do so for the
foreseeable future,” the report said.

“No reasonably foreseeable rate of economic growth would overcome this
structural deficit. Thus, any efforts to rein in future deficits must
entail either large increases in taxes to support these programs or
major restraints on their growth — or some combination of the two.”

The US government closed its 2009 fiscal year with a record
1.416-trillion-dollar budget deficit and the White House forecasts an
even bigger gap of 1.502 trillion dollars in fiscal 2010, said the
committee from the National Research Council and the National Academy of
Public Administration.

“The federal government’s fiscal ship is headed toward dangerous
waters,” said John Palmer, dean emeritus of the Syracuse University
Maxwell School and co-chair of the panel.

“Our committee members have varying political backgrounds and views, but
we all agree that future economic prosperity is at grave risk if our
nation does not change its fiscal course.”

Delaying action for even five or 10 years will make addressing the
problem more painful and costly, the report notes. Delay also raises the
risk that the nation’s creditors, especially foreign governments, will
conclude that the US has no plan to restore fiscal stability and will
demand higher interest rates to keep buying US debt.

The researchers pointed out that the budget problems, which were already
in grave difficulty ahead of the financial crisis, will worsen as the
baby boom generation enters retirement, pressuring government health and
retirement funds.

The report noted that the US government debt now totals more than 12
trillion dollars — of which 7.5 trillion dollars is publicly held,
about half of this by investors abroad.

“If policies do not change, a large and increasing debt will expand the
portion of the budget required to pay interest on the debt, especially
if interest rates rise, and thereby reduce the resources available for
all other government activities,”the report said.

“Increasing debt also may contribute to a loss of international and
domestic investor confidence in the nation’s economy, which would, in
turn, lead to even higher interest rates, lower domestic investment, and
a falling dollar.”

The report called for a target of stabilizing the ratio of the nation’s
debt to its gross domestic product (GDP) of no more than 60 percent.

“While there is no magic number for this ratio, the committee judged
that a ratio of 60 percent is an achievable target within a decade, and
can be a useful guide to policymakers,” it said. “Any higher ratio would
create an unacceptable risk of higher interest rates and financial
crisis.”

The study funded by the MacArthur Foundation in an effort to create
better public awareness of the implications of the fiscal problems,
suggested a variety of ways to address the shortfall.

Panel co-chair Rudolph Penner, a fellow at the Urban Institute, said
that although these are difficult decisions, “everyone will benefit in
the long term if we accept some short-term pain.”