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America keeps living on borrowed money

US PRESIDENT Barack Obama released his $3.80 trillion Fiscal Year 2013 budget on February 13 (the US fiscal year begins on October 1 and ends on September 30). The new budget, under the current law, will offer $4 trillion in deficit cuts over the next decade, including $517 billion in mandatory savings. The 2013 budget projects a deficit of $901.40 billion or 5.50 percent of projected gross domestic product (GDP) and contains information on Obama’s priorities.

US PRESIDENT Barack Obama released his $3.80 trillion Fiscal Year 2013 budget on February 13 (the US fiscal year begins on October 1 and ends on September 30). The new budget, under the current law, will offer $4 trillion in deficit cuts over the next decade, including $517 billion in mandatory savings. The 2013 budget projects a deficit of $901.40 billion or 5.50 percent of projected gross domestic product (GDP) and contains information on Obama’s priorities.

The structure of US budget expenses has changed considerably since the 1960s. The budget outlays for Social Security and Medicare were $20.69 billion and $64 million respectively in 1967 (yes, millions for Medicare, not billions) representing 2.48 percent and 0.01 percent of US GDP.

Meanwhile, expenses on “research and development”, e.g. NASA outlays for manned missions to land on the Moon, were nearly $6.7 billion in 1966 (or 0.80 percent of GDP). The budget for 2011 included expenses for NASA of $29.46 billion, but outlays for Social Security and Medicare have increased to $730.81 billion and $485.65 billion respectively (or 0.20 percent, 4.84 percent and 3.22 percent of US GDP). These facts clearly illustrate how US governments have decreased their emphasis on productive investment for the future, to non-productive “social” outlays over the past few decades.
Over the past ten years the US budget has accumulated deficits of $7.31 trillion and in 2009 recorded its highest ever annual deficit of $1.41 trillion. The main reasons behind high deficits are social security outlays and military spending.

For Fiscal Year 2012, outlays on Social Security reached $778.57 billion and expenses pertaining to national defence increased to $716.30 billion. Total estimated budget outlays for 2012 are $3.79 trillion with receipts at $2.47 trillion. The budget deficit as a percentage of GDP should reach some 8.58 percent, which is a drop from the record high of 10.13 percent in 2009.

The actual appropriations for Fiscal Year 2013 must be authorised by Congress before the budget can come into effect. Under current law, the Budget Control Act of 2011 mandates caps on discretionary spending levels. In addition, several temporary tax cuts are currently scheduled to expire at the beginning of the 2013 calendar year. The Budget Control Act of 2011 was passed in August 2011 as a resolution to the debt-ceiling crisis.

The 2013 budget will be the first to be affected by the second of two rounds of budget cuts specified in the act (the first round of cuts has already been applied for the ten years starting in Fiscal Year 2012). For this second round of cuts, the Budget Control Act formed a "super committee”. This consisted of six representatives from each party and was required to identify at least $1.2 trillion in cuts over ten years beginning in Fiscal Year 2013. The act specified automatic across-the-board cuts if no such budget reduction legislation were passed by Congress. However, the committee announced in November 2011 that no agrrement would be reached.

Enormous public spending aimed at diminishing the catastrophic impacts of the financial and economic crisis of 2009 on the US economy underlined the needs for new cuts, especially in areas like defence and Social Security.

Obama is seeking more money for his priorities, including education, infrastructure and manufacturing, while increasing taxes on upper-income Americans and many corporations (such as oil companies).

The immediate reaction to the Obama budget has demonstrated that spending and taxes are likely to be the source of many political battles leading up to the November election. Fiscal Year 2013 begins on October 1 (of this year), so Congress must reach a spending agreement before then to avoid a government shutdown.

Budget overview

The budget provides a plan to raise more than $1.5 trillion over the next decade through tax reform (including the expiration of tax cuts for single taxpayers making over $200,000 a year and married couples making over $250,000), allowing the 2001 and 2003 high-income tax cuts to expire and the estate tax to return to 2009 parameters, and incorporating the so-called "Buffett Rule", which would require households earning more than $1 million to pay at least 30 percent in income taxes.

For defence-related outlays, the budget delivers $525.4 billion in discretionary funding, a decrease of 1 percent, or $5.1 billion, from the 2012 enacted level. Over the next ten years, the Department of Defense will spend $487 billion less than was planned in the 2012 budget. This is a 5-percent reduction.

The budget provides $27.2 billion for energy in discretionary funds, a 3.2-percent increase above the 2012 enacted level. This request includes increased funding for priority areas such as clean energy, research and development to spur innovation, and advanced manufacturing. Savings would be achieved by $41 billion in cuts to fossil fuel subsidies over the next ten years.

For homeland security the budget provides $650 million to fund important research and development advances in cyber security, explosives detection, and chemical/biological response systems, also over the next ten years.

The transportation budget provides $74 billion in discretionary and mandatory budgetary resources, an increase of 2 percent, or $1.4 billion, above the 2012 enacted level. The proposal has a six-year, $476-billion surface reauthorisation plan to modernise the country's transportation infrastructure.

The highest annual compounded growth of spending over the next decade is for interest payments on the substantial debt which the US government owes to international creditors, especially to China as the biggest owner of American treasuries, and to Japan as the second largest holder of US government securities.

The US Federal government deficit as a percentage of GDP could drop to near 3.40 percent over the next five years if Obama’s priorities gain the authorisation of Congress (see graph below). However, a protracted battle is expected over future budget priorities.

The author works for WBP Online

Topic: Finances and Advisory


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