The good news: Americas deficit is declining, according to the non-partisan Congressional Budget Office. The bad news: after reaching 2% of GDP in 2015, deficits will start to rise, eventually reaching 3.3% of GDP in 2023 and 6.4% of GDP in 2038.
Debt held by the public as a percent of GDP would grow from 73% in 2013, decline to 71% in 2023, and then skyrocket to 100% in 2038.
CBO admits that it is difficult making projections as far out as 2038, but the trend is troubling. America faces serious fiscal imbalances due to increasing entitlements.
What to do?
Congress must put steps in place to grow the economy and cut spending. Here are three steps for economic growth and three steps to cut spending.
The fastest way to grow the economy is tax reform. Individual tax reform is mired in political complications, because, essentially, Republicans want to lower tax rates and Democrats want to raise them. But corporate tax reform is politically easier. House Ways and Means Committee Chairman Dave Camp, Senate Finance Committee Chairman Max Baucus, and President Barack Obama are all on record as calling for lower corporate taxes.
Americas top corporate tax rate is 35%, compared to an Organization of Economic Cooperation and Development average of 24%. We tax corporations on their worldwide income, whereas the majority of OECD countries tax corporations on their domestic income.
The Senate Permanent Subcommittee on Investigations has estimated that American companies hold offshore around $1.7 trillion of earnings from foreign operations. With a lower U.S. tax rate, corporations would surely repatriate some of these funds, adding to investment and employment.
Energy policy reform
A second way to grow the economy is energy policy reform. America sits on vast reserves of energy, and North America is becoming the worlds top oil producer. Low-cost energy can spur economic growth, not only by providing jobs in extraction and refining, but by attracting energy-intensive manufacturing back to the United States from abroad. Yet accessing reserves on federal lands poses a major obstacle to development.
North Dakota has the lowest unemployment rate in America, at 3%, by developing its private oil and gas shale resources. If these resources had been on federal lands, permitting would have slowed down economic development.
The federal government needs to allow states to make permitting decisions on natural resources within their borders. Some, such as North Dakota and Pennsylvania, will choose to use these resources. Others, such as New York, will choose to leave the oil and gas in the ground.
Health care reform
Job growth requires health care reform due to penalties on employers in the Affordable Care Act. As much as Republicans dislike the Affordable Care Act, it will be with us until America has a Republican Congress and president. Still, its negative effects can be ameliorated. Most damaging to the economy are the requirements that employers with 50 or more employees have to offer health insurance to their workers or pay a penalty of $2,000 per worker per year.
This means that any firm with 49 employees could face penalties of $40,000 a year from adding one more worker. Small firms all over the country are putting expansion plans on hold due to this law. Others are hiring part-time instead of full-time workers — because no penalty is due on employees who work fewer than 30 hours weekly.
It is not surprising that employment growth is low, that discouraged workers are dropping out of the workforce, and that the labor force participation rate is at 1978 levels. Congress should pay for the health care program out of general revenues, rather than through a tax on employment.
Social Security reform
Social Security reform is vital to cut spending and the deficit. As people live longer, they receive more Social Security benefits. In order to keep the programs in balance, either the retirement age has to rise, contributions have to increase, or the government has to reduce benefits.
Social Security benefits are indexed to levels of wages in the economy rather than levels of prices. By changing the indexing of benefits to reflect prices, so seniors benefits keep up with inflation, the program can be moved towards balance. Raising the retirement age gradually over time will accomplish the rest.
These reforms, to take effect in 10 or 20 years, will not affect current spending, but will put America on a path to fiscal balance.
The Supplemental Nutrition Assistance Program, formerly food stamps, unemployment insurance, Medicaid, and Social Security disability have been expanding over time. These programs need to be adjusted in the short term.
For example, unemployment insurance, which used to be available for 26 weeks, is now available up to 73 weeks, depending on the state. On average, unemployed Americans can receive 53 weeks of unemployment insurance.
Over 8.9 million adults received disability insurance from the Social Security Administration in July 2013, the latest data available. The number of people receiving benefits is 23% higher compared to five years earlier and 55% higher than 2003. Benefits are higher, too. Recipients get an average of $1,129 monthly, 12% more than in 2008 and 35% more than in 2003.
Over 47 million Americans receive benefits from the Supplemental Nutrition Assistance Program (formerly food stamps), Other elements of the federal safety net include mortgage relief, and Temporary Assistance to Needy Families. The provision of subsidized health care for those earning below 400 percent of the poverty line under the Affordable Care Act, beginning in 2014, will exacerbate this.
Congress needs to devolve programs to the states, which know better how to help their needy populations than Washington, D.C. For example, Rhode Island and Indiana have lowered their Medicaid costs due to innovative programs using consumer choice.
Discretionary spending cuts
Only a politician would be unable to cut spending from our $3.5 trillion budget. We spend about $12 billion a year on tax incentives and grants to make electricity more expensive using wind and solar. We fund the Corporation for Public Broadcasting, when we have hundreds of private cable and satellite and broadcast channels. Farm and highway programs are set up to waste money, rather than conserve it. Although most cuts must come from entitlements, because that is where the spending is, there is scope for discretionary spending cuts beyond the sequester.
The fundamental problem, as Hudson fellow Christopher DeMuth has written, is that Congress has become incapable of making reasonable decisions in a timely manner. People can propose solutions, but Congress delays until a crisis forces action, rather than proceeding in a thoughtful manner. Until this changes, there is little hope for sensible policies to fix the debt, no matter how urgent the calls from CBO.
Original Source: http://www.marketwatch.com/story/how-to-grow-the-economy-and-cut-spending-2013-09-20