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Fixing the Deficit: Do It Now ... Or Later?

Monday, 27 Sep 2010 | 10:50 AM ET

The debate is over whether to cut spending now to help lessen the deficit

The deficit forecast for 2011 is $1.066 trillion

The nation’s budget deficit and accompanying debt burden is one of the rare issues that generates agreement; the difference in opinion is over whether it is a big problem now or a big problem later.

It also happens to be one of those issues whose ownership shifts from party to party depending on which one is in power. And partly because of that, becomes grist for the blame-game dialectic.

The financial crisis and the worst recession in half a century put both the deficit and the debt into a new league. And were it not for that, the issue would not be such a big one.

Deficit of Knowledge

The budget deficit and the national debt are often confused, but the best way to keep things straight is to understand that the former leads to the latter, meaning the annual deficit (or the rare surplus) increases or decreases the overall debt, which is essentially a running tally of the money the government has borrowed and the accruing interest.

The annual budget deficit is the result of spending and revenue projections, with the former being more accurate than the latter. It’s hard to predict tax revenue, and a surprise one way or the other can greatly affect the bottom line—which is almost always negative. So can emergency spending programs.

That said, current-year budget deficits (the federal government's fiscal year runs from October to September) are real and accurate, at least on a monthly, year-to date basis, while out-year ones and the national debt are heavily influenced by the assumptions of forecasts.

From Bad …

The fiscal year 2010 budget deficit as of August was $1.260 trillion.

As of July 27, 2010, total outstanding public debtwas $13.26 trillion, roughly two thirds of that—$8.698 trillion—is debt held by the public.

In late July, the White House lowered its 2010 federal budget deficit estimate by $84 billion to $1.471 trillion.

That would still be a record-high deficit as the government spends massive amounts of money to pull the economy out of the worst recession in decades.

The 2010 deficit of 10 percent of GDP is about the same as the 2009 level, it noted. The 2009 fiscal year ended with a record deficit of $1.417 trillion.

Your Money Your Vote - A CNBC Special Report
Your Money Your Vote - A CNBC Special Report

In fiscal 2011, the deficit is projected to be $1.416 trillion, or 9.2 percent of GDP. That was $150 billion higher than projected in February.

The Congressional Budget Office'slatest budget projections for this year and next are better than first expected. For 2010, the deficit will hit $1.342 trillion, down slightly from the March projection of $1.368 trillion. The 2011 forecast is a $1.066 trillion deficit, vs. the March estimate of $996 billion.

… To Worse

Looking down the road, however, the CBO —which carries a non-partisan reputation—estimates that public debtwill go from $6.3 trillion, when Barack Obama became President to $20.3 trillion by 2035. (That $53,000 vs. $170,000 per household).

The CBO further estimates that federal spending will climb to 26 percent of GDP within the next decade, while public debt will amount to 87 percent of GDP—more than double what it was in 2008.

By, 2035, government spending will account for and as much as 35 percent of GDP and the public debt 185 percent. (The previous high for the debt-to-GDP ratio peaked was 109 percent.)

Now Or Later

Those numbers are so scary that some advocate tackling the deficit now before things get any worse, especially because so much of the debt is simply interest on borrowed money.

The contrarian view is that cutting spending now will jeopardize the economic recovery, which, among other things, will lead to higher tax revenue. The deficit can be dealt with later, so the argument goes, when austerity measures will be felt less.

The opposition party typically argues for swift action and restrained spending because it is not in power and is rarely seen responsible for the state of the economy. Incumbents want to avoid or delay action on the deficit because they need to show results on the economy.

Deficit Economics

The deficit issue is a particularly tricky one this year because about one fifth—$135 billion of the federal stimulus package—was aid to states facing fiscal crises of their own.

The bulk of the money helped cover unemployment and Medicare costs, allowing states to save money elsewhere, a move that saved some jobs that would otherwise have been cut.

Nevertheless, states from California to New Jersey have been slashing jobs and services while raising fees and taxes to satisfy balanced-budget provisions in their constitutions; and though fiscal 2009 may have been the bottom for many states, 2010 wasn’t much better and 2011 will be a struggle.

Forty states implemented mid-year cuts to their fiscal 2010 budgets, totaling $22 billion, according to the National Association of State Budget Officers. General fund spending was down 6.8 percent for fiscal year 2010.

The 2011 budget year—which began July 1 in many states—will take center stage in the fall gubernatorial elections. Planned spending of $635.3 billion will be $52 billion lower than it was in 2008.

Governors have proposed $5.1 billion in revenue-raising measures, including higher taxes and fees, for 2011, after $31.4 billion in 2010.

The National Conference of State Legislatures estimates states faced a combined budget gap of $83.9 billion when creating their 2011 budgets.

States have been pleading for more federal aid for months, knowing that the bulk of the stimulus money has been allocated—an issue that already divides Democrats (pro) and Republicans (con) in Washington and is also likely to play on a local level.

A survey by the National League of Cities, National Association of Counties and U.S. Conference of Mayors found that cities will cut 8.6 percent of their full-time workforce between 2009 and 2011.

Some 60 percent of the cities surveyed have made cuts in the area of public safety and public works. That means police officer and firefighter jobs, as well as fixing potholes—services and functions voters are likely to notice.

In the big picture, then, one man’s ballooning budget is another’s shrinking one.