WASHINGTON, Jan. 13 (UPI) -- The U.S. federal budget is on an unsustainable path, and in the absence of any significant policy changes, federal deficits could total around $5 trillion over the next decade, former Treasury Secretary Robert Rubin said Tuesday.
"As the baby boomers increasingly reach retirement age and claim Social Security and Medicare benefits, government deficits and debt are likely to grow even more sharply," Rubin said during a briefing hosted by the Center on Budget and Policy Priorities.
"The scale of the nation's projected budgetary imbalances is now so large that the risk of severe adverse consequences must be taken very seriously, although it is impossible to predict when such consequences may occur," said Rubin in a conference call to brief reporters on an economic white paper.
According to Rubin, who chairs the executive committee at the financial services giant Citigroup, most analyses of sustained budget deficits demonstrate the negative effects of deficits on long-term economic growth.
"Virtually all mainstream economists agree that there is a connection between fiscal conditions" -- and the potential for negative effects across a broad swath of economic fronts ranging from interest rates to the financial markets, the former treasury secretary said.
Rubin explained how under the conventional view, ongoing budget deficits decrease national saving, which reduces domestic investment by the government and increases borrowing from abroad. Interest rates play a key role in how the economy adjusts. The reduction in national savings raises domestic interest rates, which dampens investment and attracts capital from abroad.
Borrowing from abroad helps fund government expenditures. However, this leads to a larger current account deficit, made up of the trade deficit and the amount of foreign investment, which is closely linked to the budget deficit.
Under the standard analysis, Rubin added, the reduction in U.S. domestic investment and the increase in the current account deficit both reduce future national income -- taxes, fees and the like -- with the loss in income steadily growing over time. The costs imposed by sustained deficits tend to build gradually over time, rather than occurring suddenly.
But, he said, "The adverse consequences of sustained large budget deficits may well be far larger and occur more suddenly than traditional analysis suggests, however. Substantial deficits projected far into the future can cause a fundamental shift in market expectations and a related loss of confidence both at home and abroad. ... Substantial ongoing deficits may severely and adversely affect expectations and confidence, which in turn can generate a self-reinforcing negative cycle among the underlying fiscal deficit, the financial markets, and the real economy."
Rubin said that while the economic stimulus implemented by the Bush administration three years ago was "appropriate" in the short term, further tax cuts amid increased spending has led to burgeoning deficits which pose a potential danger to the United States and the world economy.
Since taking office, Bush has pushed through tax cuts worth around $1.7 trillion over a 10-year period. For the fiscal year ended Sept. 30, the U.S. budget deficit hit a record $374.2 billion or 3.5 percent of the U.S. gross domestic product.
Despite the administration's forecast that the deficit will be cut in half over the next 10 years through disciplined budgets and a rising economy, which yields larger tax receipts, Rubin said that the majority of other estimates show that the "projected deficits get worse every year from the effects of the baby boomers."
The International Monetary Fund gave an unusually strong warning last week over the dangers of the rising U.S. deficit in one of its series of "occasional" papers, which it issues for national economies. This is the second such warning the multilateral financial institution has issued.
"(The) deficit is likely to be sustained ... which raises longer-term issues," not just for the U.S. economy, but for overall global economic prospects, said Charles Collyns, deputy director of the IMF's western hemisphere department last week in a phone call with reporters.
The IMF warned that the evaporation of fiscal surpluses accumulated over the 1990s "has left the budget less well-prepared to cope with the retirement of the baby-boom generation, which will begin later this decade and place massive pressure on the Social Security and Medicare systems."