In Ohio on Wednesday President Obama announced that Social Security "is not in crisis" and that only "modest adjustments" are required. He has long promised that his health care plan will not add "one dime" to the deficit. Yet, a new report from the International Monetary Fund concludes that, long-term, our government is in worse financial shape than Greece, and that this problem is driven in large part by both programs, particularly the new health care plan.
Greece has built up so much debt and so many financial obligations that the difference between all future expenditures and revenues, the so-called "fiscal gap," equals 11.5 percent of its GDP for perpetuity. In other words, as things are currently scheduled, every single year, forever, government expenditures will exceed revenue by 11.5 percent of GDP.
A recent article in The Financial Times by Professor Larry Kotlikoff at Boston University described the situation this way: "The Greek fiscal gap is staggering." No wonder Greece's creditors doubt that Greece will be able to pay back the money it borrows.
Well, a new IMF report on the United States issued on July 12th estimates that the U.S. fiscal gap is about 14 percent of GDP. The estimate tries to get around the accounting gimmickry politicians hide behind and crunch the numbers using the same requirements that businesses must abide by. And that leads us to this question: if the Greek fiscal gap is "staggering," how are we supposed to describe the U.S. fiscal gap?
This year's federal budget is spending about 25.4 percent of GDP. To stop the slide toward catastrophe that spending would have to be cut to 11.4 percent. Alternatively, all federal government tax revenue would have to double from its current 14.8 percent of GDP. Or there could be some changes in both spending and tax revenue that would sum to 14 percent.
Where is this huge fiscal gap for the U.S. coming from? The IMF mentions the massive unfunded promises that have been made with Social Security and Medicare. But on page 54 of the report they specifically mention Obama's new health care law:
"The main drivers of the fiscal gap are rising health care costs that under current law will boost mandatory spending to above 18 percent of GDP by 2050. Since the federal government has historically collected about 18.4 percent of GDP in tax revenues, this means that mandatory programs may absorb all federal revenues sometime around 2050, or as early as 2026 when the cost of servicing the debt is added."
To put it differently, as long as the U.S. doesn't repudiate its debt and spends anything on national defense and other so-called non-mandatory programs, this day of reckoning will hit well before 2026.
The $1.5 trillion deficit that Obama has forced on the country this year and the similar deficit last year are bad enough. The IMF is warning Americans that it is "necessary" that the new health care law be reined in "to restore fiscal sustainability."
Americans better heed this warning, and heed it quickly. Every year that the problem is put off and Obama's massive deficits continue will make it much harder to face the day of reckoning. Greece's riots may soon be occurring here.
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