Communication for Sustainable Development

The shape of fiscal crisis to come

WASHINGTON, DC - NOVEMBER 30:  House Speaker-d...Image by Getty Images via @daylife
The American fiscal condition faces a perfect storm. The outlook for the medium term has deteriorated markedly, important causes being the Great Recession and the extension of the Bush tax cuts. Nor are the projections cheerful in the long term. And these issues will come to a head. On 4 March, the spending authority that has kept the US going in the past budgetary period is set to expire.
Last year, Congress did not pass a budget, and a special measure was put in place to legally underpin spending in the absence of an official budget. This "stop-gap" bill needs to be replaced. Another deadline is looking also: the day the US hits its debt ceiling. By law, the budget deficit must not exceed $14.3tn. It will likely reach this maximum at the end of May. To raise the ceiling would require an act of Congress.
Democrats and Republicans have hurried to the barricades in preparation for the budget battle. Actually, the term "barricades" is misplaced. Democrats and Republicans will dig themselves deeper into the trenches and only raise their heads above the parapet if the other party makes a move. Obama's 2012 budget proposal is no more than a long wishlist that offers few real solutions to the debt problem.
Its main aim is to draw out the Republicans. The Democrats will try to divide the Republican party by playing off the right against moderate conservatives – in the hope of forcing the Republicans to come up with iron-fisted measures that would allow the Democrats to paint them as heartless.
Most likely, far-reaching reforms will be deferred until after the presidential elections in November 2012. The political climate in Washington has become so poisonous and partisan that both parties fear a catastrophic electoral outcome if they fall foul of voters. Opinion polls are responsible for some of this angst: the great majority of respondents express a wish for deficits to be curtailed while simultaneously rejecting cuts in specific programmes.
Politicians may remove the obstacles that could stop the federal government from operating in the short term: the much-vaunted "shutdown". Still, they will not tackle the essential issues. Lawmakers are yelling at the top of their voices that the US should pursue a sustainable fiscal policy, but there are five extremely costly areas of government spending that no politician would dare touch: defence, Medicare, Medicaid, tax breaks and social security. But if Democrats and Republicans fail to strike a grand bargain, eventually the markets will be merciless.
The US will end up in a vicious circle of mounting indebtedness, soaring interest rates, increasing interest payments, and even more debt. Until the start of 2013, the markets will probably show patience; but once it turns out that no major progress is made after the 2012 elections, they will rebel.
Politicians and the public will need to recognise that the present welfare state is not sustainable. Not least because the population is ageing, while untenable promises have been made and money has been squandered in the past. The western model of the democratic-capitalist welfare state is coming apart at the seams. As yet, though, no one seems prepared to make the sacrifices necessary to shape a "slenderised" version of the welfare state that is not all doom and gloom for the younger generations.
If the markets force the issue, they will demand hard choices. By then, it will no longer be possible to implement a process of gradual reform that shares the burden evenly across the population over a long period of time. Instead, discontent and uncertainty will prevail, while political populism could become even more entrenched. This will make it only harder to effect the necessary changes.
This negative scenario is not a given. Americans could acknowledge that the present course leads to the abyss. Ironically, Europe could help the Americans become aware of this. The eurozone is shaking to its foundations: its population will age sooner, and its national debts are already a heavy burden. Some countries are now facing unsustainably high interest charges. There is a lot to learn from the European example – if Americans take heed, there is still time to avert disaster.

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