The US government must develop a plan next year to control the burgeoning debt; otherwise, it could face panic in the financial markets, experts warn.
Although the US government should refrain from raising taxes and cutting spending to avoid jeopardizing the fragile economic recovery, painful changes will need to be made by 2012 to keep the debt at a ‘manageable’ 60 percent of gross domestic product (GDP) by 2018, assesses the Peterson-Pew Commission on budget reform. Without taking steps, investors could lose confidence in the US, causing a decline in the dollar’s value and an increase in interest rates, stated commission member Jim Nussle, a former Republican congressman and budget official. This, he adds, could lead to a sharp decline in the standard of living in the country.
"We will have less freedom if we do not address this," said Nussle, who previously served as budget director in the White House and chairman of the House Budget Committee. The Peterson-Pew Commission, which has 34 members, released its budget reform report at a time when Congress is preparing to raise the debt ceiling from the current level of $12.1 trillion to allow the government to continue operating counter-cyclically.
US debt has more than doubled since 2001, due to the worst recession since the 1930s, multiple rounds of tax cuts, and wars in Iraq and Afghanistan. The upcoming wave of retirements of the so-called baby boom generation this decade makes the situation even more difficult.
The US debt currently stands at 53 percent of GDP, while it was 41 percent of GDP a year earlier. It is likely to rise to 85 percent of GDP by 2018 and to 200 percent of GDP by 2038 if drastic changes are not implemented, the Commission reported. The Commission did not provide a prescription for changes but stated that it will likely be necessary to raise taxes and reduce government spending.
