Entitlement Reform Likely Remedy for US Fiscal Deficits
Oxford Analytica expects the Obama Administration to embark on entitlement program reform as early as this autumn, in an effort to address ballooning goverment deficits that could retard economic recovery.
“If widening federal shortfalls drive up long-term interest rates, they will undermine both current efforts to stimulate the economy and US trend growth potential, ” OxAn says in UNITED STATES: Swelling deficit could retard recovery.
Therefore, the Obama administration is likely to unveil a medium term plan to assuage market concerns about the sustainability of US public finances — involving entitlement reform — perhaps as soon as this as this autumn.
The prospect of the budget deficit remaining in excess of 1 trillion dollars per year over the next decade raises a number of concerns about longer-term interest rates and the value of the dollar:
Persistently large deficits can harm a country’s longer-run economic growth potential by:
- stoking inflationary expectations;
- raising long-term interest rates; and
- reducing the level of national savings and investment.
The IMF observes that with US discretionary (non-entitlement programme and debt maintenance) spending already low by historical standards, correction of the budget deficit will require significant revenue increases. The IMF’s recommended remedial measures include:
- broadening the tax base by reducing the deductibility of corporate debt and mortgage interest;
- introducing a federal consumption tax;
- hiking energy taxes; and
- improving tax compliance.
However, all of these measures — with the possible exception of tightening tax compliance — would be politically costly for the Obama administration.
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