While the extension of Bush-era tax cuts dominated headlines during the recently-concluded lame duck session of Congress, the coming year will bring with it a renewed focus on public debt – whether policymakers like it or not.
A fiscal reckoning is fast approaching – one that extends far beyond the $13.8 trillion in debt accumulated by politicians in Washington D.C. (a figure which has more than doubled over the last seven years). State and local government debt is also spiraling out of control – climbing to a record 22 percent of GDP this year.
And unlike the federal government, states and municipalities cannot simply print money to continue fueling their reckless expansion.
“We’ve been living in fantasy land,” liberal California Gov. Jerry Brown acknowledged last month in addressing California’s $19 billion deficit. “It is much worse than I thought. I’m shocked.”
Like their counterparts in Washington, D.C., state and local politicians engaged in an orgy of unsustainable spending leading up to the recession. From 2000-2007, total state and local spending increased from $1.73 trillion to $2.66 trillion – a 23.7 percent increase after adjusting for inflation.
Counting the “stimulus” years, total state and local government spending has now climbed above $3.2 trillion annually – a 49.2 percent increase from a decade ago after adjusting for inflation.
By comparison, America’s population grew by only 9.7 percent over the last decade.
After living on borrowed money (and borrowed time), the cost of maintaining unnecessarily large government at all levels is about to reach a breaking point. That means policymakers in Congress, state capitals, county council chambers and town halls all face a simple choice – scale back this rampant growth or generate new revenue through additional borrowing or tax increases.
Clearly tax hikes would cripple our economy – and after the November elections there is no way Washington will approve another federal bailout funded with borrowed billions. Also, with interest payments on the debt projected to reach half a trillion dollars annually within the next five years, the federal government simply cannot sustain any additional borrowing.
Assuming that state and local leaders lack the political will to make long-overdue cuts (a safe bet), where will these “cash-strapped” governments turn as they face skyrocketing Medicaid premiums and plummeting property values?