The Federal Deficit and Consequences for Our Future

Looming over many of the public policy questions facing our country at this time, be it defense and military spending, Social Security or Medicare, is the growing federal deficit. Earlier this year, the nonpartisan Congressional Budget Office (CBO) issued a report — The 2012 Long-Term Budget Outlook  — that offers a fairly sober assessment of the current challenge. The report opens by stating: “In the past few years, the federal government has been recording the largest budget deficits since 1945, both in dollar terms and as a share of the economy.”

According to the CBO, the rising deficit is caused by a number of factors, including the aging of the baby boomer generation, turmoil in the financial sector, declining tax revenue, and an increase in government spending.

The CBO lists several negative consequences to the rising of debt:

  • greater debt would result in higher interest payments on that debt, which would eventually require higher taxes, a reduction in government benefits and services, or some combination of the two;
  • rising debt would increasingly restrict policymakers’ ability to use tax and spending policies to respond to unexpected challenges, such as economic downturns or financial crises;
  • growing debt also would increase the probability of a sudden financial crisis, during which investors would lose confidence in the government’s ability to manage its budget and the government would thereby lose its ability to borrow at affordable rates.

One take away: Democrats and Republicans will need to put aside their partisan differences to address this issue in a responsible manner.

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