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2011-02-15 11:21:39
Budget Proposals

By Kathleen Madigan

The latest federal budget proposals suggest both the White House and Republican leadership hope to cut government spending without addressing the massive outlays from Social Security and Medicare.

Their denial is akin to going on a diet while intending to eat a piece of chocolate cake every night.

The Obama administration released its budget for fiscal 2012 on Monday. The efforts to trim spending focused on the discretionary part of government services, including everything from less money for Pell Grants to cutting subsidies to wealthy farmers.

The budget release followed Friday’s proposals by the Republicans to trim $62 billion in spending this fiscal year, which ends Sept. 30, 2011.

Neither set of proposals, however, targets the growing demands from Social Security and Medicare.

According to the nonpartisan Congressional Budget Office, spending on the government’s major mandatory health-care programs including Medicare along with Social Security will increase rapidly in coming years. The spending equals roughly 10% of gross domestic product in 2011 and will rise to about 16% over the next 25 years.

“If revenues stay close to their average share of GDP for the past 40 years, that rise in spending will lead to rapidly growing budget deficits and surging federal debt,” the CBO warned. “To prevent debt from becoming unsupportable, policymakers will have to substantially restrain the growth of spending, raise revenues significantly above their historical share of GDP, or pursue some combination of those two approaches.”

In other words, reductions to the two major entitlement programs will be needed to pare the federal deficit to a manageable level. (Economists think a deficit equal to 3% of GDP would be low enough to have little impact on economic growth and bond market attitudes.)

So far, however, the White House and Congressional leaders are avoiding the subject. In a game of fiscal chicken, each side wants the other to go first.

The end result is that the U.S. risks the bond markets or credit rating agencies will lose patience.

Politicians do not realize — or choose to ignore — that sentiment among investors can change in a blink of an eye. What is acceptable now may be a trigger for chaos down the road.

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