The U.S. deficit - A moment of truth
By Bob Campbell - January 20, 2011
Excessive deficits are an issue that has spread across the globe, and that will be a common topic at the World Economic Forum next week as well. Several G20 countries have had their debt already exceed 100% of their GDP—and we are already reading of the public and political issues that have occurred as a result. And in the United States, the problem is acute.
Some months ago, I had the good fortune of being appointed as one of the 18 members of the Bipartisan Policy Center Debt Reduction Task Force—referred to in the media as the Domenici/Rivlin Commission. This was one of two major deficit-related studies which were reported out late in 2010, the other being Simpson/Bowles.
Even with the 37 years I have spent in public policy and public administration while at Deloitte LLP, it was an extraordinarily eye-opening and, in some cases, troubling experience. Why? Because the U.S. deficit and cumulative debt have been rising at a level that is simply unsustainable. Based on our analysis, our U.S. debt will approach 100% of U.S. GDP by the end of this decade. And interest alone on that debt will likely exceed $1 trillion a year! Perhaps more disconcerting, we found that U.S. revenue will only be adequate to cover current Medicare obligations, current Social Security obligations, and interest in 2025.
Clearly action is required and there is not much time to waste. Why should this matter to corporate America? If Federal borrowing has to continue to rise, we will ultimately see the cost of borrowing increase as well, and with rising interest rates likely rising inflation. Addressing this issue over time will be important to both confidence in the dollar and the surety with which U.S. corporate leaders can make longer-term capital commitments.
The Commission considered several alternatives and ultimately proposed some specific recommendations. Of note, our task group reached unanimity on the recommendations. Also of note, were our plan fully implemented, savings to the Federal government would approach $29 trillion over the next 20 years. You may be interested in reviewing the final report, which is attached. And, again, this is obviously also a big global issue. For more insights on the global implications of the rising debt, please see the Deloitte Research report Red ink rising.
You certainly may ask what would lead me to believe that Congress would be inclined to do anything, even with a well-thought out plan in hand. That’s a very good question. One could certainly look at the 2010 election results and key platform positions of the winners to gain some confidence. It certainly is clear that most of the new members of Congress were elected in part based on their commitment to get Federal spending under control.
Regardless of one’s confidence—or lack thereof—we will soon have some hard evidence. The first real test is likely going to be when the current legislated Federal debt ceiling is reached this spring. That ceiling can only be raised by Congressional action, otherwise certain areas of the Federal government will shut down. It will be very interesting to see what program cuts and policy changes are negotiated in exchange for a commitment to support raising the debt ceiling.
It will be a fascinating issue to follow this spring!
Bob Campbell, Deloitte LLP U.S. State Government Leader, has, throughout his 36-year career with the Deloitte U.S. firm, worked closely with government leaders to address and resolve critical policy, financing, and operational issues at all levels of government. He has worked extensively with leaders of major federal agencies and more than 40 states on projects touching nearly every area of government concern.