CNE: Debt ceiling deal harmful to fiscal health

Written by  //  August 3, 2011  //  Economy  //  No comments

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CNE Director of Public Policy Sergio Marxuach

The approved plan to increase the United State’s debt ceiling will not solve the country’s fiscal problem, and could actually worsen it by reducing economic activity on the short- and mid-term, Sergio Marxuach, policy director for the Center for the New Economy said Tuesday.

Furthermore, he said the approved spending cuts and other fiscal changes are “bad news for Puerto Rico,” Marxuach said, given that federal funds constitute 22 percent of the local government’s consolidated resources for fiscal 2012.

Following several tension-filled last couple of days, on Tuesday Congress finally agreed to increase the amount of debt the federal government can issue to between $2.1 trillion and $2.4 trillion, and to significantly slash government spending over the next decade. President Barack Obama quickly signed it, avoiding an unprecedented national default.

Throught the bi-partisan agreement, the federal government’s debt ceiling increases by some $400 billion immediately and another $500 billion after September. The ceiling will increase by between $1.2 billion and $1.5 billion by the end of the year, as long as Congress approves additional spending cuts adding up to at least $1.2 trillion.

Meanwhile, the agreement requires cutting back government spending of some $917 billion between 2012 and 2021. These cuts are broken down as follows: $741 billion of savings in discretionary spending; $20 billion savings in mandatory expenses; and about $156 billion savings in interest payments, as less money will be borrowed as a result of the agreement.

“The magnitude of the U.S.’s fiscal problem is simply monumental. Even if the approved agreement is strictly followed, the country’s debt will still increase by $7.3 trillion by 2021,” Marxuach said. “That’s so because the agreement does not increase collections and does not propose reforms to the Social Security, Medicare, and Medicaid programs.”

The deal also places a cap on discretional spending, limiting it to $1.04 trillion in 2012, with an annual growth rate of 1.8 percent to $1.23 trillion in 2021. Discretional spending changes will mostly hit national security expenditures.

“Although we do not know which specific programs will be cut, to the extent that these federal resources are cut, the government of Puerto Rico will have to replace them locally, and the general fund, even with the revenue generated by the new 4 percent excise tax, is very compromised,” Marxuach said. “In fact, you could say that the government currently lacks sufficient resources to meet all its obligations and what it has promised the people.”

Another significant clause in the agreement is the $15 billion increase to crack down on fraud in federal programs such as Social Security, Medicare, Medicaid and the State Children’s Health Insurance Program. By eliminating misuse of funds, the government is expected to generate $16 billion in savings.

The budget agreement also increases Pell Grant earmarks by $10 billion in 2012 an by $7 billion in 2013.

The agreement reached between Congress and the White House will not contribute significantly to the country’s economic growth over the next decade.

Click HERE to read the CNE’s full analysis in Spanish.

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