Facing the so-called “fiscal cliff” on Dec. 31 had taxpayers worried, confused and in some cases even frightened for the past few months. Then, last week we received news from Treasury Secretary Timothy Geithner that Dec. 31 also marked the day when our government will reach its borrowing limit of $16.4 trillion.
Remember the battles on Capitol Hill back in 2011 when we faced the borrowing limit before? We’re up against the limit again because the United States spent $1.3 trillion more than we took in in the past year.
A legal limit on federal debt was first enacted during World War I and has been increased 13 times since 1995. The most recent increase came after a major political battle in the summer of 2011. It was a conflict that also led to Standard & Poor’s stripping the United States of its AAA credit rating.
As we learned back then, the real debt ceiling is the one eventually imposed by global financial markets. When we hit that, Congress won’t be able to raise the ceiling even if it wants to. The only options then, to avoid a financial crisis, will be massive tax hikes and brutal entitlement cuts.
With the fiscal cliff garnering all of the attention this week, maxing out our credit limit will take a back seat to the bickering and political maneuvering that will mark the eventual compromise that will come from public pressure on politicians to work out a deal. In the meantime, Geithner can probably squeeze out another $200 billion or so to get us through another couple of months.
According to James Pethokoukis, editor of The American Enterprise Institute, spending is out of whack. If tax rates were left alone (according to the Congressional Budget Office) tax revenue would average about 18 percent of the nation’s Gross Domestic Product (GDP) over the next decade. That would be equal to its 40-year average and about $2 trillion more than today’s revenue level.
He goes on to opine that under current law, spending would average 23 percent of GDP through 2022 versus the historical average of 20 percent. At that time, other major expenses like Medicare will really start to take a budgetary bite. No realistic amount of tax increases could completely offset that.
For now, we ponder the thoughts of our leaders and their action (or inaction) to the tax increases and spending cuts dictated to us if we fall over the fiscal cliff. Last week Senate Majority Leader Harry Reid said, “We will do what’s best for our caucuses and for the American people.” We wish he would have put the people before politics but at least he got us in the same sentence.
At some point in the near future, Congress and President Obama will need to raise the debt ceiling and make plans to cap future spending and reform entitlements. Wouldn’t it be great if they could do it while they dance on the brink of the cliff; but, that would take a major fiscal facelift.