Higher taxes will be inevitable to help pay for the trillions of dollars the federal government is spending—creating, actually—to offset the economic contraction caused by the novel coronavirus pandemic. So says James Capretta, resident fellow at the American Enterprise Institute and former Office of Management and Budget associate director in President George W. Bush’s administration.
Since World War II the average annual federal budget deficit amounted to three percent of the gross domestic product (GDP), Capretta told participants in the Jewish Policy Center’s May 6 conference call, “Covid-19, Stimulus, and National Debt.” Legislation passed by Congress and signed by President Trump in March and April attempted to arrest the U.S. economy’s decline from best in 50 years to fastest shrinkage since the Great Depression. Trillions of dollars in new subsidies and loans, some forgivable, are going to businesses, institutions and individuals.
James Capretta
That means the average annual budget deficit for fiscal 2021 will reach 18 to 20 percent of GDP, Capretta said. “That’s just not something we’ve dealt with” in decades.
Perhaps more worrisome, “accumulated debt for fiscal 2021 is projected at 108 percent of GDP,” he added. “That is well beyond anything that’s occurred since World War II.” Ideally, debt should not exceed 80 percent of U.S. GDP, according to Capretta.
Debt in this case is the federal government’s annual budget shortfall. Deficit is the amount Washington owes as accumulated over years.
But “the crisis is so huge, potentially so damaging” that “now is not the time to scale back on all these [new] commitments,” he said. That is so even if the Federal Reserve System and U.S. Treasury’s new lending facilities and financial backstops essentially amount to running the printing presses “at a really massive rate” with potentially inflationary consequences.
‘A Mountain of Debt’
However, once effective treatments and a vaccine are developed—perhaps by 2023—it will be necessary to face “the mountain of debt that accumulated earlier” and should have been dealt with “two, three, four or five years ago when things were good.” Capretta, concurrently a senior advisor to the Bipartisan Policy Center and former senior health policy analyst for the U.S. Senate Budget Committee and House Ways and Means Committee, said he wasn’t blaming any one political party. But he noted “it’s always prudent to prepare for a rainy day, and now we’re in a hurricane” without having begun to fight the growth of federal indebtedness beforehand.
The cause of America’s fiscal squeeze is well-known, Capretta said, and it existed long before the current pandemic. It is “the growing mismatch between entitlement spending and revenue.”
Entitlement spending in the federal budget refers primarily to Social Security, Medicare and Medicaid. With an aging U.S. population, the mismatch will grow, continuing to restrict other government allocations, including defense.
“There’s no way to get into balance by making just cuts,” Capretta asserted. “There is always room for cuts,” but projected growth in entitlement spending and for interest payments on the debt—government bonds sold to investors including foreign governments, China’s among them—will demand new revenue as well. Meanwhile, projections including one from the Congressional Budget Office, put future debt-to-GDP in an economically burdensome range of  150 percent to 180 percent.
So long as the dollar remains the world’s preferred reserve currency and global investors continue willing to park their money

Ver todos los episodios