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What is hidden by conflicts over US government finances

Montreal, Monday, October 7, 2013 – Already partially paralyzed by the lack of agreement over budgetary spending, the United States must in the coming days increase the legal debt ceiling for a 13th time since 2002. These two chronic problems are due to the explosion of mandatory spending related to social programs that cannot be offset in the long run by tax increases, according to the Viewpoint on US Government Finances published today by the MEI.

This publication notes that successive budget deficits, even in good times, have had the effect of causing the American debt to increase substantially, from 49.3% to 72.6% of GDP over the past twenty years.

For Germain Belzile, economist and coauthor of the Viewpoint, increasing taxes to balance its finances is just a way for the government to refuse to come to terms with the problem. For example, creating a 5% sales tax, like the GST in Canada, would only cover supplementary spending for a dozen years. This tax would need to be continually raised, up to 15% by 2035. And even this draconian and politically unthinkable option does not offer a sustainable solution to the problem, continues Mr. Belzile.

The projections of the Congressional Budget Office show that the current situation is not an exceptional one due to the economic crisis, but instead is the result of a structural problem.

“These past 20 years, mandatory spending has risen nearly twice as fast as US GDP, which is an unsustainable rate. In their current forms, Medicare, Medicaid and Social Security will make balancing the budget more and more difficult in the future. The unsustainable increases in government spending must therefore be tackled by undertaking a deep reform of American social programs,” says Jean-François Minardi, public policy analyst at the MEI.

The Viewpoint on US Government Finances was prepared by Germain Belzile and Jean-François Minardi, respectively senior fellow and public policy analyst at the Montreal Economic Institute. This publication is available on our website.

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The Montreal Economic Institute is an independent, non-partisan, not-for-profit research and educational organization. Through its publications and conferences, the MEI stimulates debate on public policies in Quebec and across Canada by proposing wealth-creating reforms based on market mechanisms.

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Interview requests: Jasmin Guénette, Montreal Economic Institute / Tel.: 514 273-0969 ext. 2225 / Cell: 514 592-4056 / Email: jguenette@iedm.org

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