And it will only get worse with the $1 trillion deficit spending increasing the national debt each year. The increased debt increases, in turn increases interest expense. Mandatory increases in entitlement obligations are the primary reason for the annual deficit spending. And it only gets worse as the baby boomers reach retirement age. SS and Medicare spending has got to be dealt with to avoid a Greece-like situation in the US in the next 3 to 5 years.
Budget Shortfall Looks Out of This World
That underscores the government's fiscal challenge as it looks to bring long-run deficits to heel. It also highlights dangers for both stock and Treasury investors that will become more apparent later this year—austerity of some flavor likely lies ahead, creating a fiscal drag that could sap economic growth, and with it, stock prices. But if government fails to react, today's superlow Treasury yields may be wildly underestimating the risks facing investors.
The reduction (the Obama Budget) is largely dependent on the elimination of tax breaks—no sure thing. And it is tough to make up the difference through spending cuts. Strip away mandatory spending, interest payments and defense appropriations, and only about 19% of the current fiscal year's budget is truly discretionary. Even shutting down everything outside that mandatory and defense bucket would have left a deficit of nearly $700 billion in the current fiscal year.
They also don't include off-balance-sheet liabilities like Fannie Mae and Freddie Mac.Whatever the mix of higher taxes or spending cuts, a big fiscal drag will hit economic growth.