Look at the chart below — when you add up the entitlement programs, you know — the ones you can’t cut back on, and interest payments on the grotesque debt load, we have 65% of total government spending that can’t be touched. In the next decade, under status quo policies, this “mandatory” share of the spending pie goes to 72%. Tack on the defense budget, my friends, and we are up to 88% of federal government outlays that are next to impossible to reverse. So tell me — we are going to reverse this seemingly intractable runup in the public debt to GDP ratio by slicing 12% of the spending pie that is discretionary? It won’t be enough, even if all that 12% remainder ‘pork and barrel’ spending were eliminated altogether.
So guess what the future holds … higher taxes: very likely a national sales tax. It works in Europe. It has also worked in Canada. Japan is planning to double its national sales tax from 5% to deal with its fiscal challenge (see page A11 of the WSJ). It stands to reason that a federal consumption tax will have to be part and parcel of any U.S. strategy to solve what is increasingly becoming an intractable budgetary deficit. The only question is when, and which politician is going to have the kahoonas and face the nation with the fiscal realities of the present and future. Alan Greenspan weighed in on the topic in today's Wall Street Journal, rather appropriately concluding that “our economy cannot afford a major mistake in underestimating the corrosive momentum of this fiscal crisis. Our policy focus must therefore err significantly on the side of restraint." Also see what other central bankers are saying now about the sad state of fiscal affairs globally on page B4 of the NYT (Cut Budgets to Stimulate, Central Bank Tells Europe).
