Economist: US Debt Larger Than That of All 28 EU Nations
By: Roqaya Zamzam
A collapse of the dollar’s value will be an inevitable wakeup call pushing the U.S. government to solve its fiscal problems, said Ali Soliman, professor at the Department of Economics at the British University in Egypt, during an event held at AUC last Monday.
Soliman, who formerly worked as the Chief Executive Officer (CEO) of the Islamic Cooperation for the Development of the Private Sector (ICD), said, “the [US government’s] deficit is aggregated because of accumulation of debt to governmental agencies, social security systems and that owed internationally.”
The U.S. national debt of $17 trillion, which is more than the debt of all 28 European Union (EU) countries would have risen had the country paid higher rates of interest.
He explained that according to the “easy money policy,” introduced by American Economist Alan Greenspan, debt interest payment would be around 11 percent, or $415.688 million a year. He added that the hourly interest payment is about $47.5 million dollars.
Soliman said that the penchant of Republican-dominated Congress to reduce federal taxes along with the government’s failure to cover expenditures were the main reasons behind the crisis.
“Taxes constitute the main source of income for the federal government standing at $217 trillion while spending was $382 trillion,” he said.
“This year, the US budget barely covered 57 percent of the annual expenditures. Policies shifted from President Clinton’s time; public spending increased, taxes were cut and $700 billion were spent on salvaging the banking sector,” he added, explaining that those reasons led to expenditures outweighing revenues, which caused an annual deficit equivalent to 43 percent of the nation’s budget.
Soliman said that the US relied on borrowing, particularly in external markets, to cover its deficit.
This was made possible by the readiness of other countries, especially China, Japan and Switzerland to lend the US.
“In effect, the large budget deficit was reflected in a large deficit in the US trade balance, particularly with China,” he added.
He said that countries couldn’t borrow from others indefinitely, especially after realizing that they transfer the burden of the debt onto the next government.
Soliman added that public debt shouldn’t grow faster than the rate of growth of future revenues. “However the total debt outstanding is equivalent to 100 percent of the country’s GDP,” he said.
In the economist’s opinion, the US should work on solving its problems since it is considered a rich country with individual wealth of $27 trillion dollars and has the distinct advantage of the “mighty dollar.”
According to him, the integration of politics in solving the issue is crucial. He explained that the core problem is linked to parliamentary politics that US President Barack Obama has to negotiate and cleverly solve.
“When solving crises, the matters become complicated by partisan politics; the divergence between congressmen’s interests and those of the nation become apparent,” he said.
Soliman added that early solutions were sought, in spite of congressional resistance, when president Obama issued an executive order in 2010 to create the Simpson-Bowels commission.
“They issued a statement with a set of recommendations to reduce federal deficit by nearly $3 trillion and eliminate it by 2013,” he said.
The commission recommended reducing public spending by $2 trillion during the following six years including cutting $800 billion in military spending, which meant closing half of US military bases oversees.
It also included recommendations to reduce health programs and reforming the tax system to increase revenues by $1 trillion.
“Congress refused in a quick vote in Dec. 2012 to adopt the statement, thus [making] way for the Oct. 2013 crisis,” said Soliman.
He explained that the crisis started at the end of Sept. 2013 when the two chambers of Congress failed to agree on a new federal budget for 2014.
The budget proposal included a higher deficit level and approval to raise the debt ceiling.
“Lack of congressional approval led to the government shutting down from Oct. 2 to Oct. 16,” said Soliman, adding that eventually, an agreement was reached with “little concessions to republican demands.”
“If [the U.S. government] works on crises from now, the debt can be reduced by 50 percent in 2035,” he added, saying that the changes required are huge and necessitate a high level of vision and leadership.
