Why the Budgetary Talks Are Critical to America’s Future

Budgetary Talks Are Critical to America’s FutureThe national debt ceiling debate was initially expected to be resolved by January 1; but when that date came around, it was extended to May 18, as the two sides continue to debate the budgetary cuts, the deficit, and the increase in the debt ceiling above the $16.4-trillion legal limit.

While something needs to be done, President Obama and Congress must also understand that major cuts in fiscal spending to lower the deficit, at this point, could hurt the current economic recovery, which has been showing encouraging signs over the past year. The housing market is hot, with rising construction and sales and home prices that are edging higher. The Federal Reserve’s buying of mortgage bonds and the existence of near-zero interest rates together were the catalyst.

The combination of fiscal and monetary policy is clearly helping the economy, so it would be a grave error to cut spending at this critical time. Taxes for those earning over $400,000 have jumped. Those earning less are also seeing some increases in taxes. The end result was a decline in the consumer confidence reading to 58.6 in January, well below the 61.0 estimate by briefing.com and the 66.7 reading in December. The numbers suggest that consumers may become more hesitant in wanting to spend, given the tax increases.

For the government, the current debt limit will be reached soon. Without the extension of the debt ceiling deadline, the government would have run out of money to pay its employees, support programs, and cover other key spending items.

Nobel Prize economist Paul Krugman is not in favor of cutting spending to curtail the deficit and debt due to its negative impact on the economy. (Source: Curtin, S., “Krugman: Yes, We Have To Fix The Deficit Eventually–But Not Now,” The Daily Ticker, Yahoo! Finance, January 29, 2013.) To some degree, I agree with Krugman and understand that spending cuts must be evaluated carefully, being cautious of stalling the country’s economic recovery. Yet I also believe that something must be done to curb the massive debt level and deficit.

Some may argue that the debt limit should be raised, but there must be something in place to battle the deficit and excess spending. Fitch Ratings suggests that if the debt limit is not increased in a “timely” manner, America’s debt rating could be downgraded.

In the article, Fitch Ratings notes that the use of the debt ceiling was “an ineffective and potentially dangerous mechanism for enforcing fiscal discipline. It does not prevent tax and spending decisions that will incur debt issuance in excess of the ceiling while the sanction of not raising the ceiling risks a sovereign default and renders such a threat incredible.” (Source: Ahmed, S., “Fitch Warns of US Downgrade Over Debt Fight,” CNBC, January 15, 2013, last accessed January 30, 2013.)

Do too little, and the debt and deficit will grow even more out of control. Do too much, and the economy will likely stall at this sensitive stage of economic recovery.

Yet, ultimately, there will have to be a compromise between growth and deficit and a careful analysis of where the budgetary cuts will originate from.

The post Why the Budgetary Talks Are Critical to America’s Future appeared first on Investment Contrarians.

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