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As the battle over healthcare continues to heat up, the economic picture for the future of the United States has again come into focus. The Congressional Budget Office (CBO) and the White House both reported earlier this week that the U.S.’ deficit will balloon to a record $1.6 trillion this year, representing 11.2% of gross domestic product (GDP). For opponents to President Barrack Obama’s healthcare plan, the news provided a red flag against increasing federal spending.

Though NACM’s Credit Managers’ Index (CMI) showed that the U.S. economy hit bottom in March and other analyses have agreed with a similar timeframe, the CBO anticipates recovery will be “slow and tentative.” The predictions are for 1.6% annual growth as 2009 matures, with GDP growth of 2.8% from the fourth quarter of 2009 to the first quarter of 2010. The CBO predicts a slow build up to 3.8% GDP growth by 2011 and that the average annual growth seen in 2012 and 2013 will be around 4.5%.

As the economy recovers, and if all policies remain as they are today, the agency estimates the nation’s deficit would shrink, but remain above $500 billion per year, more than 3% of GDP, for the duration of 2010 until 2019. Public debt over that time frame would increase from 54% of GDP to 68% of GDP by 2019. That would be double the low seen in 2001 of 33%. But the problem looming is that healthcare costs are expected to increase rapidly if something isn’t done. Last year, outlays for Social Security, Medicare and Medicaid combined for 9% of GDP. Over the next decade, that percentage is expected to hit 12% of GDP by 2019 and total 17% of GDP by 2035. If that is allowed to happen, the CBO warns that it would pose a threat to U.S. economic stability because federal debt and the deficit would grow substantially.

For the ten year period from 2009 to 2019, CBO’s baseline combined deficit projection is roughly $7.1 trillion, $2.7 trillion more than the estimate it released in March. In contrast, the White House’s Office of Management and Budget (OMB) predicts a combined deficit of $9.1 trillion during that same ten year period. CBO’s Director Douglas Elmendorf calls a comparison of the two projections “apples-to-oranges.” The OMB assumes Obama’s proposed policies will be approved.

“President Obama inherited the major causes of the deficit -- including debt-financed tax cuts and an economic crisis from the last administration -- but he has accepted the responsibility to leave our nation on sounder fiscal footing than he found it,” said House Majority Leader Steny Hoyer (D-MD). “The Recovery Act, even while it added to the short-term deficit, staved off catastrophe and is bringing this recession to an end.”

Hoyer said that the mid-session reviews of the budget are clear signals to Congress and the White House that efforts must be made to bring the deficit under control. He added that, “because the cost of health care is the single biggest contributor to our deficit, it is imperative that we pass a health care reform bill that brings peace of mind to middle-class Americans, while reducing costs.”

Not unexpected, the other side of the aisle saw a different picture. Republicans have rallied around the White House’s $9 trillion figure and see the deficit projection as a clear sign that the nation’s fiscal health is on a slippery slope.

“The Obama administration’s announcement that the 10-year federal deficit has risen to $9 trillion is staggering,” stated Senator Lamar Alexander (R-TN). “We’re on track to double the national debt in five years and triple it in 10 years. This is a flashing red light for any health care proposal that doesn’t reduce the cost of health care for Americans and their government.”

Senator Sam Brownback (R-KS) called the amounts of money being discussed simply “shocking.” "If the Administration stays this course, the gross federal debt will more than double to $24.5 trillion, more than 107% of the projected size of the economy,” claimed Brownback. “Particularly troubling is that these deficits will come with income taxes rising to one of the highest levels on record as a percentage of GDP."

With the deficit debate developing, adding fuel and fodder to the healthcare discussion, the Department of Commerce’s Bureau of Economic Analysis (BEA) released its complete analysis of economic growth. The agency says that real GDP edged down 1% in the second quarter of 2009, a better performance than the expected 1.5% drop and a much smaller decline than the 6.4% seen in the first quarter.

And despite grumblings about the breadth of the Recovery Act, the CBO, OMB and others have all agreed that the plan averted even worse disaster.

“The economy’s better than expected performance in the second quarter suggests that it is beginning to stabilize,” said Commerce Under Secretary for Economic Affairs Rebecca Blank. “The Recovery Act and other economic initiatives have put the brakes on the worst economic downturn in generations – but we are not out of the woods yet.”

Matthew Carr, NACM staff writer. Follow us on Twitter @NACM_National

 

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