Not surprisingly, the central piece in the talk continues to be the mounting debt and policies that could address that, and more specifically the taxes. The Bush tax-cuts are perhaps going to be the coming election’s campaign theme.
Related to the talk on taxes, WSJ today publishes an article “The Democratic Fisc” which uses the White House’s budget office numbers, published on Friday last week, to have a look at the past performance and future outlook of the U.S. economy. WSJ says “the main message is that tax revenues are smaller, spending is greater, and the deficits are thus larger than the White House has been saying”.
The article compares the current period with the 1981-82 recession which is similar in its severity with the one the current administration inherited. What strikes me are the following differences between these two periods:
| 1981-1987 | 2009-20012 | |
| Budget Deficit: | less than 6% of GDP | current 9.9% of GDP, it is expected to rise to 10%, before it declines to 5.6% of GDP |
| Revenues: | 17.3% of GDP, despite pro-growth tax cuts | 14.5% of GDP, expected to increase to 15.8% in 2011 when big tax increases hit |
| Policy: | tax cuts across-the-board | spending, temporary tax rebates, jobless benefits |
The findings, from the above table, clearly raise the long debated question about the effectiveness of spending and tax cuts. I will return to this later.
Some other factors that enhance the bleak future economic outlook are described by (1) the expectation that deficits will not shrink bellow 3.4% of GDP over the next ten years, (2) the ratio of debt-to-GDP will continue to increase over the same period, (3) there is no plan yet to fight debt, (4) spending is expected to increase and (5) taxes are increasing -- this is not a request of the fiscal commission, which means that perhaps more taxes are coming.
