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US budget deficit: Finding solutions

The US budget deficit is surging and is likely to remain high for years unless Congress finds solutions. Some financial experts say that remedies will have to include new taxes.

By / Staff writer / February 24, 2010

Peter Orszag, director of the Office of Management and Budget, addresses a morning television audience from the White House on the issue of the federal budget, which includes large deficits.

Jason Reed/Reuters


The US government has run budget deficits for years, but the problem may no longer be something the nation can easily ignore. What's changed in the past two years is the scale of the red ink – and the resulting surge in the national debt.

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The fiscal crunch is suddenly more visible on several fronts:

President Obama has laid out a budget in which, even when the economy recovers, deficits would remain far above what most economists believe is sustainable. The president has called for a fiscal commission to offer ideas on how to reduce the gap.

•Government debt has soared high enough that it could crimp economic growth, some economists say.

•Baby boomer retirements are adding to strains on entitlement programs. Social Security is poised to pay out more in benefits this year than it takes in.

The United States isn't facing an immediate revolt by creditors, as Greece is, but the issue is no longer an off-in-the-future one.

"What we used to refer to as 'long term' isn't long term anymore," says Robert Bixby, who heads the Concord Coalition, which promotes fiscal responsibility. "The long term has arrived."

Here's a look at the fiscal challenge and how it might be addressed:

How bad is the problem?

It's severe but far from unresolvable. The hardest part is political – finding a way to nudge both major parties toward bipartisan action.

The Government Accountability Office estimates that if Congress extends all the Bush tax cuts and does not tame spending, the debt problem will quickly spiral out of control. By 2019, interest due on the debt would more than triple as a share of gross domestic product (GDP), or the overall output of goods and services. The trend would persist, driven by Medicare costs and by tax revenues that fail to keep up. (See chart.)

So, are taxes going up?

Slowing the surge in spending is the vital part of any budget fix. But the looming budget gap is so large that many finance experts say taxes must rise. Mr. Obama has called for higher taxes on households earning more than $250,000 a year. He also drew sharp criticism from Republicans when he said he was "agnostic" on whether his fiscal commission would consider broader-based tax hikes.