Consequences of Spending

July 27, 2012

Americans have grown increasingly knowledgeable – and increasingly concerned – about the government’s recent explosion of spending and debt. Americans also have begun to understand there really is no “free lunch.” Washington’s fiscal recklessness has consequences, and these consequences grow exponentially worse with every day policymakers fail to get our nation’s fiscal house in order.

Higher Taxes, Higher Cost of Living

No government money is free money. Every dollar the government spends must be taken from the private sector through taxation, inflation, or borrowing. Right now, the government is financing its overspending through borrowing and incurring debt that will have negative consequences.

  • As the national debt grows out of control, policymakers contemplate major tax hikes and increasing the money supply to pay our debt with less valuable money.
  • Tax increases hamper economic recovery and hinder prospects of future growth.
  • Increasing the money supply leads to higher prices and makes American families’ savings less valuable.

America’s Credit Score

On August 5, 2011, the U.S. was downgraded for the first time in history to an AA+ rating by Standard & Poor’s (S&P’s), signaling that the U.S. Treasury is no longer one of the world’s safest investments.1 Recently, S&P’s has affirmed this decision, citing the political divide in Washington and the inability of lawmakers to make any serious headway in addressing America’s debt burden.2 To make matters worse, the S&P’s has threatened to downgrade our credit rating again, should Washington fail to reach compromise on taxes and entitlement spending by the end of this year3. Even so, Washington still continues to spend under a heavy debt burden and heavy financial obligations.

As Congress struggles to balance the budget and manage out-of-control debt levels, America must compete with other nations to borrow money. Because of the increased risks associated with buying U.S. debt, investors would likely require a higher interest rate. This could eventually push U.S. interest payments higher and worsen the country’s debt situation.

Dampened Economic Growth, Fewer Job Opportunities

High government spending can hurt the economy. Why? Government spending crowds out spending by the private sector. Each dollar spent by government – whether local, state or federal – is a dollar that has to be raised by taxing the private sector. Furthermore, higher unemployment increases families’ uncertainty about future disposable income, causing the economy to slow down.

Less Flexibility

Over the next 10 years, interest payments and mandatory spending (such as Medicare, Social Security, and Medicaid) will consume more than 76 percent of projected federal revenues, or 76 cents out of every dollar collected in taxes4.

  • This means less tax revenue will be left to fund all other government functions: from providing for defense and homeland security to education and the environment. Any additional spending will be done with borrowed money.
  • If nothing is done to address our underfunded entitlement programs, the programs’ beneficiaries, taxpayers, and our nation’s security will pay a price.

Crushing Burden on Future Generations

Between 2013 and 2022 interest payments on the debt, adjusted for inflation, will more than double – spiking from $233 billion to $604 billion.5

  • When more of our money goes to pay interest on our debt, there is less money available to spend on other priorities. This is true for the government since a growing portion of the federal budget will be spent on interest payments and also for the economy overall since more resources will be eaten up by interest.
  • When government controls more of our economy and resources, the productive job-creating sectors are crowded out. Over the long run, this weakens our economy and threatens the financial stability of American families.

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  1. The Washington Post. “S&P downgrades U.S. credit rating for the first time.” August 5th, 2011. http://www.washingtonpost.com/business/economy/sandp-considering-first-downgrade-of-us-credit- rating/2011/08/05/gIQAqKeIxI_story.html
  2. CBS News. “S&P affirms reduced U.S. credit rating.” June 8th, 2012. http://www.cbsnews.com/8301-505123_162- 57449868/s-p-affirms-reduced-u.s-credit-rating/?tag=contentMain;contentBody
  3. The Washington Times. Debt fight poses new risk to U.S. credit rating. June 14, 2012. http://www.washingtontimes.com/news/2012/jun/14/debt-fight-poses-new-risk-to-us-credit-rating/?page=all#pagebreak
  4. Figure found by dividing the total net interest and mandatory spending of Fiscal Years 2013-2022 by total revenue of the same years. Congressional Budget Office. Updated Budget Projections: Fiscal Years 2012-2022. March 2012. http://cbo.gov/sites/default/files/cbofiles/attachments/March2012Baseline.pdf
  5. Congressional Budget Office. Updated Budget Projections: Fiscal Years 2012-2022. March 2012. http://cbo.gov/sites/default/files/cbofiles/attachments/March2012Baseline.pdf

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