Feds: Deficit Needs a Fix … Fast

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The economic situation in America isn’t exactly great right now, but according to the man in charge of the U.S. budget, we could face an even more serious fiscal crisis in the next few years if politicians don’t get their act together.

Peter Orszag, the director of the Office of Management and Budget, expressed concerns Tuesday that the U.S. is on an “unsustainable fiscal course” and could face a budget crisis down the road if legislators don’t act quickly enough. "Frankly, the political system does not deal well with long-term problems until they become a crisis, and we do not want this to become a crisis," he said, speaking at a Reuters Newsmaker event.

Last year, the U.S. budget deficit grew to nearly 10% of the gross domestic product, or $1.4 trillion. By comparison, the previous year’s deficit was $459 billion, which was already considered sky-high. Orszag estimates that number will drop down to 5% by the year 2015, but he says we need to cut that down even further, to 3%. Unfortunately, Orszag says that our ability to accomplish this depends less on the U.S. economy and more on what he calls our “political economy.”

“Everyone wants the deficit to be addressed, but they are against everything proposed to address it,” he said. “What folks are willing to cut is much less than you would think.”

Orszag isn’t the only one to urge for deficit reduction. Ben Bernanke, the Federal Reserve Chairman, also pushed for it earlier this year. As it stands, health care reform may prove the most significant step on the path to deficit reduction, but Congress still needs to decide whether they will impose new tax hikes or cuts in government spending to reduce the deficit.

Orszag’s concerns carry even more significance now, as other countries around the world are on the verge of financial collapse. Spain’s economy is in tatters and Greece had to be bailed out by Europe earlier this month after its national debt ballooned, putting the country in danger of bankruptcy.

"We want to make sure we never wind up facing the sorts of choices that Greece now faces. However bad something looks right now, we want to make sure we are not in that position,” Orszag said.

For many Americans, the terms national debt and national deficit may appear interchangeable, but there is a difference. The deficit is based on the amount of money the government spends each year relative to the amount of revenue it earns from taxes and other sources. Whatever money is owed gets tacked on to the national debt, which is essentially the grand total of what our country borrows by selling off U.S. Treasury bills. It’s usually the national debt that causes Americans to break a sweat. The U.S. debt now stands at more than $12 trillion and, according to one White House review, it could reach $14 trillion by the end of this fiscal year. But as Orszag pointed out, the deficit is ultimately what could prove fatal to our economy.

Yet, Orszag does see many reasons to be optimistic about the economy. He believes strongly that the Recovery Act (more commonly known as the stimulus package) has succeeded in resuscitating America’s economy. He expects that 70% of the funds from this bill will be paid out by the end of this year, which is on track with original goals. But he admits that, like any economic recovery, there is “always a risk” that this will be a jobless one.

According to Orszag, there are three stages to a typical recovery: a “rapid fire period of growth,” followed by an increase in the number of temp hires and an expansion of the average work week, and lastly, a period where more people actually get hired full time. “I think we are just now entering into that stage,” he said, but quickly added that the “unemployment rate is going to remain elevated for a significant period of time.”

Orszag did also reveal one tidbit that might make taxpayers out there a bit nervous. He repeatedly avoided answering questions about whether President Obama would backtrack on his campaign pledge not to raise taxes for Americans earning $250,000 or less a year. Yet, he did say that the budget deficit commission will “explore whatever options it deems appropriate.” The administration publicly refuses to take any option off the table, “even those we don’t prefer.” This proposal would undoubtedly be unpopular, but many argue that raising taxes is a sensible course of action given our debt and deficit concerns.

For now, Orszag will continue to toil away in his role as director of the budget office, despite rumors recently that he would be stepping down. “I have no plans to leave,” he said. “I enjoy what I’m doing.”

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