The ambitious plans of the new President to cut taxes for the middle and lower classes, while dramatically expanding social services: particularly health care and education, could leave the United States in an ocean of debt unparalleled in history.

The Congressional Budget Office, the nonpartisan public office which analyzes and calculates the effects of government budgets, released a report Friday projecting an increase in the national deficit which deviates from the President’s estimates by up to 5 per cent over the next ten years.

The CBO’s full report, available online, says that the budget deficit this year will reach roughly $1.7 trillion (12 per cent of GDP), while next years will balloon an additional $1.1 trillion. By 2012, the report says, the deficit would shrink to roughly 2 per cent of GDP until about 2019; assuming current laws and policies remain in place that long.

These calculations pin the deficit at about $9.3 trillion over the next decade; over $2 trillion more than the President’s announcement identified when he announced the budget. It is important to note, these calculations do account for an easing recession and increased stability to a currently weak financial system — citing an expected marginal improvement for the end of 2009, and an expected growth in 2010 and 2011.

The report focuses on an increase in government revenue expected of about 5 per cent of GDP over the next 3 years. This increase, to roughly 20 per cent of GDP by 2012, is explained by a projected increase in revenues from the alternative minimum tax, and the expiration of one year economic stimulus-related tax legislation in December 2010.

The CBO also suggested that U.S. GDP will perform at about 7 per cent below potential GDP for the next two years, a result of unemployed labour and capital due to the acute economic shock; but this output gap should ensure that inflation remains low over the years to follow.

The CBO’s analysis results in a much less optimistic prediction than that of the White House, but better than that of many other economists. This is a direct result of the predictions the Budget Office made regarding the outcome of the recession currently being felt; forecasts of 2.5 per cent growth per annum over the next decade are 0.3 per cent lower than those of the White House.

President Obama’s promise to halve the previous administration’s $1.3 trillion by the end of his first term will prove to be a difficult task. Friday, Obama told reporters and lawmakers that he is now “having [aides] go through the books line by line” in order to meet these lofty goals.

Many, it seems, discuss the national debt with no understanding of what it actually means. Historically, many countries have defaulted on their debts — simply by choosing to not pay them at face value — and many wonder how such a debt really affects a country. The United States has had short periods of being a net lender to the rest of the world, but in the last 60 years, debt as a portion of GDP has varied from over 100 per cent to the current level of about 65 per cent, falling to a lowest point in the 1970s of about 20 per cent.

In fact, there can be a great risk from being dependent on a large amount of government debt — U.S. consumption has outspent it’s production for years, which is fine, as long as the rest of the world is willing to hold U.S. Treasury bills and other obligations well in to the future. As debt increases, a devaluation of the United States as a whole could reduce the real obligation of the debt, but in turn such a devaluation would make it more difficult to entertain outside investors — as of now, a significant portion of those “outside investors” are from China. These outside investors, as devaluation takes hold, would demand higher interest rates for their money to compensate for reduced confidence (and thus a higher risk premium) in the United States; causing a painful slowdown in potential government spending.

A “debt ceiling” has been placed by Congress at any given time in recent decades which limits the amount of debt the Treasury is legally authorized to take; currently, this number sits at $11.3 trillion (most recently modified by the Emergency Economic Stability Act of 2008 in October of 2008). This system authorizes the Treasury for the 200-or-so sales of debt held each year, rather than the previous system of each debt obligation being approved independently by Congress.

Some economists believe this debt ceiling system is a sign that both fiscal and monetary policy is too lax, saying that the easing of interest rates every time there is a “crisis” encourages larger deficit spending and, in turn, temporary relief at the cost of long-term emergency. This contrasts with much of what old Keynesian philosophy would have said about deficit spending, but not to the extent that some would believe; Keynes believed specifically in saving during booms. The U.S. savings ratio has fluctuated below zero since 2005, the first time since the 1930s; a trend that is consistent with the United Kingdom, but inverse that of the Asian emerging countries, and the balanced-debt Eurozone.

The President addressed the media coverage of the national debt and the Congressional Budget Office’s report in this week’s Presidential address, saying that the budget will be his central focus for the week. A focus on what the programs will do to restore value to the economy led the President’s discussion; but it concluded with a claim that the budget must reduce the deficit even further.

“That’s why we are scouring every corner of the budget and have proposed $2 trillion in deficit reductions over the next decade. In total, our budget would bring discretionary spending for domestic programs as a share of the economy to its lowest level in nearly half a century. And we will continue making these tough choices in the months and years ahead so that as our economy recovers, we do what we must to bring this deficit down.”

Though at this time, no more than predictions can be made, the uncertainty has left all levels of government polarized. For the most part, Republicans are prophesying an utter failure to rectify the situation, no doubt in parallel with goals of occupying the oval office at the end of what they hope will be a rocky presidency. Conversely, and to no surprise, high ranking officials of the Obama administration are speaking with an almost too reassuring optimism about the budget, its uses, and the next four years in office. Needless to say, the challenges faced by the new president are many, and with a cloud of uncertainty and mistrust plaguing not only the people of America, but the world, he would do well to remember one thing above all. Candor is paramount.

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