Why is this Topic Important to Wealth Managers? A wealth manager should be able to present Advanced Market Intelligence on the long-term economic impact of government spending and its ability to raise revenues with clients.
The United States faces daunting economic and budgetary challenges. The economy has struggled to recover from the recent recession, which was triggered by a large decline in house prices and a financial crisis—events unlike anything this country has seen since the Great Depression.
For the federal government, the sharply lower revenues and elevated spending deriving from the financial turmoil and severe drop in economic activity—combined with the costs of various policies implemented in response to those conditions and an imbalance between revenues and spending that predated the recession—have caused budget deficits to surge in the past two years. The deficits of $1.4 trillion in 2009 and $1.3 trillion in 2010 are, when measured as a share of gross domestic product (GDP), the largest since 1945—representing 10.0 percent and 8.9 percent of the nation’s output, respectively. 
Also, the recovery in employment has been slowed not only by the moderate growth in output in the past year and a half but also by structural changes in the labor market, such as a mismatch between the requirements of available jobs and the skills of job seekers, that have hindered the employment of workers who have lost their job. Payroll employment, which declined by 7.3 million during the recent recession, gained a mere 70,000 jobs (or 0.06 percent), on net, between June 2009 and December 2010. 
However, under current law, CBO projects, budget deficits will drop markedly over the next few years—to $1.1 trillion in 2012, $704 billion in 2013, and $533 billion in 2014. Relative to the size of the economy, those deficits represent 7.0 percent of GDP in 2012, 4.3 percent in 2013, and 3.1 percent in 2014. From 2015 through 2021, the deficits in the baseline projections range from 2.9 percent to 3.4 percent of GDP. 
Nevertheless, the deficits that will accumulate under current law will push federal debt held by the public to significantly higher levels. Just two years ago, debt held by the public was less than $6 trillion, or about 40 percent of GDP; at the end of fiscal year 2010, such debt was roughly$9 trillion, or 62 percent of GDP, and by the end of 2021, it is projected to climb to $18 trillion, or 77 percent of GDP. 
With such a large increase in debt, plus an expected increase in interest rates as the economic recovery strengthens, interest payments on the debt are poised to skyrocket over the next decade. CBO projects that the government’s annual spending on net interest will more than double between 2011 and 2021 as a share of GDP, increasing from 1.5 percent to 3.3 percent.
Beyond the 10-year projection period (though 2012), further increases in federal debt relative to the nation’s output almost certainly lie ahead if current policies remain in place. The aging of the population and rising costs for health care will push federal spending as a percentage of GDP well above that in recent decades. Specifically, spending on the government’s major mandatory health care programs—Medicare, Medicaid, the Children’s Health Insurance Program, and health insurance subsidies to be provided through insurance exchanges—along with Social Security will increase from roughly 10 percent of GDP in 2011 to about 16 percent over the next 25 years.  If revenues stay close to their average share of GDP for the past 40 years, that rise in spending will lead to rapidly growing budget deficits and surging federal debt.
Next week’s blogticles will discuss relevant topics for wealth managers in 2011.
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NB: This work or parts thereof originated from previous official Federal Government publication available to the public.
See generally Congressional Budget Office. “The Budget and Economic Outlook: Fiscal Years 2011 to 2021”. January 2010. http://www.cbo.gov/ftpdocs/120xx/doc12039/SummaryforWeb.pdf
. Last Accessed 2/17/2010.
 See generally Office of Management And Budget. “Budget of the U.S. Government Fiscal Year 2012”-Summary Tables. http://www.whitehouse.gov/omb/budget/Overview. Last Accessed 2/16/2011.
 Congressional Budget Office. “The Budget and Economic Outlook: Fiscal Years 2011 to 2021”. January 2010
 See Congressional Budget Office, The Long-Term Budget Outlook (June 2010), revised August 2010.