Americans are inconsistent in how they believe the budget deficit should be tackled. But growing signs of pragmatism?

It looks as if we might see a repeat of 2011’s brinkmanship regarding the US budget – remember that this game of chicken between the Republicans and Democrats was a contributory factor to S&P downgrading the US from AAA.  Few expect American politicians to make progress on debt matters until after November’s elections – but that doesn’t leave them long to prevent many automatic cuts to spending and hikes to taxes occurring in January 2013.  This fiscal cliff on 1 January will cause automatic defence spending cuts, and hikes to income, capital gains, dividends and estate taxes.  How big an impact would this have on US growth?  The Congressional Budget Office estimates it would mean that the US economy would shrink by 1.3% in the first half of 2013, but Goldman Sachs thinks that the impact could reduce first half GDP by as much as 4%.  With China slowing, and much of the Eurozone in recession, it doesn’t feel like a good time to take $600 billion out of a major economy that has at least been growing in recent quarters.

But the inability of politicians to decide how and when to tackle the US’s growing debt problem is mirrored by its population.  Here are a few opinion polls to show how it’s possible for voters to want to a) keep social security and healthcare benefits unchanged, but b) cut spending, c) not increase taxes, and d) not increase the US debt ceiling.

Which is more important: taking steps to reduce the budget deficit or keeping Social Security and Medicare benefits as they are?

Reducing budget deficit 32%
Keeping benefits as they are 60%

(Source: Pew Research Center, June 2011)

What is your favoured way of reducing the budget deficit?

Spending cuts alone, or more spending cuts than tax hikes 58%
Tax hikes alone, or more tax hikes than spending cuts 23%

(Source: Reuters/Ipsos, April 2012)

In order to reduce the budget deficit do you think it will be necessary to increase taxes on people like you?

Necessary 41%
Not necessary 56%

(Source: NYT/CBS Poll, January 2011)

Would you want your member of Congress to vote in favour or vote against raising the debt ceiling?

Vote for 22%
Vote against 42%

(Source: Gallup, July 2011)

Given that Medicare, Medicaid and social security are already around 60% of government spending, it would be a tough ask to reconcile a) leaving these unscathed and b) cutting spending.  Additionally these expenses are growing at a rate far outstripping US GDP growth, so the baseline is for significant increases to these programmes rather than cuts (mainly due to the aging population and advances in medical treatments).

But perhaps there is a growing realisation that these inconsistencies need to be addressed.  Having spent a decent amount of time in the US over the past few years, we’ve found recently that it’s become difficult to keep economists, strategists and policymakers focused on our US-centric questions and away from them asking us about the Eurozone’s problems.  And with municipalities experiencing debt distress across the States already, the question “Could we be Greece one day?” is crossing into the mainstream.

So it is interesting that a couple of developments recently suggest that American voters are thinking more holistically about the future structure of their nation’s economy.  An interview in this weekend’s Financial Times with civil rights lawyer Molly Munger discussed her success in getting a proposed income tax hike onto California’s ballot paper in November.  This new tax, currently supported in opinion polls, would boost the state education fund.  Another tax hike for deficit reduction purposes is also on the ballot paper.  At the same time voters in Wisconsin last week rejected a Trade Union backed recall vote to try to eject Republican Governor Scott Walker from office after he proposed the Wisconsin Budget Repair Bill.  The Bill would have increased pension and health contributions for state employees and reduced Union powers in bargaining.  Walker actually increased his victory margin in the recall vote compared with his 2010 election, and he is the first ever Governor to keep his seat in a recall vote.

Signs of a changing attitude towards the debt burden?  Possibly, and that has to be positive – but we still expect a great deal of turbulence around the debt ceiling issue after the Presidential elections.  That turbulence will be exacerbated by a likely split between control of the Presidency and that of Congress, although some have suggested that this would be the best outcome as there will have to be a compromise in the breakdown of long term budget reduction between spending cuts and tax hikes, rather than one or the other taking all the strain.

Finally, there is increasing discussion of a nationwide consumption tax (VAT) in the US.  Even a small VAT could make significant inroads into the deficit each year.  Is this a popular view in the States?  Well when I typed “us consumption tax” into Google, the second automatically generated search is “u.s. consumption tax is tempting vat of poison” so I’m guessing that’s a “no”.  However this is a silver bullet still available to the US whereas Europe, with many nations having VAT rates already at 20% has little scope to raise additional revenues through this route.