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The U.S. Budget Problem

H. Nejat Seyhun, contributing writer to The BusinessThinker magazine, is the Jerome B. & Eilene M. York Professor of Business Administration and professor of finance, Ross School of Business, University of Michigan. He is an internationally recognized authority on financial issues and Derivatives.

The current U.S. Budget deficit and the projected growth rate of the deficit, if it remains at the same level, is clearly not sustainable.  According to the Congressional Budget Office, the U.S. is currently spending about $3.7 trillion while taking in about $2.2 trillion a year a difference of $1.5 trillion or almost 50% of spending.  The four big budget items are healthcare ($820 billion); social security ($720 billion); defense and wars ($700 billion) and income security, interest, and federal pensions (totaling $840 billion).  The sum of these four items already equals about $3.1 trillion – representing 141% of revenues.  Simply speaking everything else adds up to about $600 billion meaning that even if we were to literally cut these “miscellaneous” expenditures to zero, we only get a 16% reduction in spending and the U.S. will still face huge and unsustainable budget deficits of $900 billion a year or about 6.5% of GDP.

At current projections, budget deficit in 2015 is estimated to be about $2.3 trillion (or 13.5% of the estimated $17 trillion GDP in 2015), while the U.S. debt is on track to reach $23 trillion.  We currently are pointing a finger at Greece and accusing them of irresponsible fiscal policy, yet this deficit level would surpass that of Greece, and is therefore not sensible.  The debt level in 2015 would equal 135% of the GDP.  Any loss of confidence and associated increase in U.S. interest rates on $23 trillion of debt would truly present a serious risk to the U.S. Budget and the economy.

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