Home > Government & Politics > Fiscal Austerity: Easier Said than Done

Fiscal Austerity: Easier Said than Done

Although there is still a lot of political posturing and wrangling to be done, it appears that a deal has been made regarding the extension of the Bush tax cuts.  Like most Washington deals, it’s a compromise where all sides get to claim victory. 

Here is a quick summary of the major points of the plan:

  • 2-year extension of all current tax rates
  • Reinstatement of the Estate Tax for estates in excess of $5 million
  • Extension of unemployment  benefits for an additional 13 months
  • Reduction in the employee’s portion of Social Security taxes of 2% for one year
  • Extension of several expiring tax provisions

The price-tag of this bill: $800 billion – all of which will be funded by additional U.S. debt.

There are arguments to be made for the economic and social benefits of each of the provisions.  However, while the machinations may be different, there is still an overriding principle to consider… Congress continues to spend money it doesn’t have.  While many people oppose various elements of the agreed framework, all of the politicians and economists I have heard comment on this matter support deficit-spending of some sort. 

The sluggish economy, the rapid expansion of government spending and national debt were hot issues during the recent 2010 elections. Candidates made promises of fiscal restraint and austerity.  There was a lot of drum-beating and chest-thumping over the debt and deficit and many promises to reign in government spending. 

It’s interesting how quickly Washington returns to business as usual, or remains oblivious to the wishes of the voters.  Granted, many of the new elected officials have yet to take office, but the recent tax legislation is a clear example of the challenge that lies ahead.  However, the stark reality is that fiscal austerity measures are easier said than done.  As this article in The Economist points out, President Obama and Congress have punted on fiscal austerity once again. 

The progress of the lame-duck session of Congress is a good indication that we should not expect to see a dramatic shift in the way Washington works or spends money.  Political posturing continues to take precedence over what’s best for the country. Furthermore, when faced with the choice between making tough financial decisions and pandering to certain constituencies, fiscal responsibility loses every time.

Whether anyone wants to admit it or not, hard decisions will eventually be required.  You only need to look to the recent events in Greece, Ireland, Spain and Portugal to realize that sooner or later a nation must put its fiscal house in order.  As these countries and their citizens have discovered, it won’t be pleasant, but you can’t continue to spend more than you take in forever.

Fiscal Austerity is easier said than done.  It’s also easier if it’s tackled sooner than later.  At this point, I’m not sure we can count on either.

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