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Low taxes, high health costs make US choices tough

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PAUL WISEMAN
July 27, 2011
— Wealthy countries all over the world are dealing with debts and strained budgets as they mop up after the Great Recession and brace for the budget-busting retirement of the baby boomer generation.

But the United States is in a bigger fix than almost anyone else.


The U.S. federal debt was equal to 95 percent of the overall economy in the first three months of 2011, the fifth-highest on the Associated Press Global Economy Tracker, an analysis of economic and financial data from 30 of the biggest economies.


Every year that the U.S. government spends more than it collects in taxes, it records an annual budget deficit. The $14.3 trillion debt is the sum of all annual deficits and surpluses.


As U.S. policymakers argue over raising the federal borrowing limit and slashing debts, America is hobbled in ways the others are not. Tax collections are low by historical and international standards. Health care costs are astronomical — and still rising. The political system is gridlocked.


Those problems suggest the current impasse over raising the U.S. government's borrowing limit and cutting the deficit is a prelude to even more intense political combat.


"We as a society will either have to pay more for our government, accept less in government services and benefits, or both," says Douglas Elmendorf, director of the nonpartisan Congressional Budget Office. "For many people, none of those choices is appealing — but they cannot be avoided for very long."


This year's federal tax revenues are forecast to equal 14.4 percent of gross domestic product, a broad measure of economic output, according to the Office of Management and Budget.


That's the lowest share since 1950, long before Congress approved expensive programs such as Medicare. Tax collections have been reduced by the recession and by tax cuts enacted in 2001 and 2003. Among 29 countries ranked by the Organization for Economic Development and Cooperation, only Japan and Spain take in less tax revenue than the U.S. as a percentage of GDP.


When it comes to health care, the U.S. spends the equivalent of 17.4 percent of its GDP — by far the highest percentage among wealthy nations. The next highest is the Netherlands, where health care spending equals 12 percent of GDP. Among the 34 wealthy countries that belong to the OECD, health care spending averages less than 9.5 percent of GDP.


Political gridlock magnifies America's debt woes. Among the five biggest countries with a top AAA rating from the credit rating agency Moody's, the U.S. is the only one that hasn't come up with a serious plan to control government debt, says Moody's sovereign debt analyst, Steven Hess.


The U.S. is also the only one of the five that doesn't have a parliamentary system, which allows the ruling party or coalition to pass its agenda undeterred by the opposition. After taking control last year in Britain, for instance, a coalition led by the Conservative Party enacted an austerity program of tax hikes and spending cuts.


The U.S. has a divided government — Democrats control the White House and Republicans control half of Congress. The effort to narrow annual budget deficits and reduce the debt has bogged down in partisan wrangling.


The AP Global Economy Tracker found most of the wealthy nations of the world struggling with high debt:


— Japan, which is aging rapidly and has endured more than a decade of economic stagnation, had the heaviest debt burden at the end of the first quarter: 244 percent of GDP. Economists Kenneth Rogoff of Harvard University and Carmen Reinhart of the Peterson Institute for International Finance say anything above 90 percent starts to weigh down economic growth partly by pushing up interest rates. Greece's debt was at 161 percent, Italy's 113 percent, Thailand's 111 percent and the United States' 95 percent.


— Energy-producing Canada and Norway had some of the lowest debt burdens among wealthy nations at 32 and 31 percent, respectively. The Norwegian government's finances are so strong that it issues debt mainly to ensure it has a functioning debt market and turns a profit by investing the money it borrows, says Nikola Swann, an analyst at credit rating agency Standard & Poor's.


— Fast-growing developing countries have a big advantage over rich countries when it comes to containing debts. They have younger populations and aren't facing a baby boomer retirement crunch. Brazil (28 percent) and Mexico (27 percent) had light debt burdens relative to GDP.


The U.S. does have a couple of advantages over other rich countries that help it hang onto its top credit rating even as its debts rise and political squabbling over the federal borrowing limit raises the risk of default.


Thanks to a relatively high birth rate and an even higher rate of immigration, the U.S. is aging more slowly than other rich countries. It will have a higher percentage of people working over the next few decades than Europe and Japan. Those workers will pay taxes to finance health care and pension benefits for baby boomers.


Last year, the U.S. had four active workers for every retiree; by 2050, with baby boomers out of the labor force, it will have only two, according to an S&P report on the fiscal impact of aging populations on rich countries. But the countries that are aging fastest — Japan and Italy — will have it much worse. An even split between workers and retirees will put enormous strains on their pensions and health care budgets.


Another U.S. advantage: The federal government's debts are all in U.S. dollars, giving America control of its destiny compared with countries that have to pay back debts in another country's currency. The U.S., for instance, can print dollars, driving down the value of the currency. That would make it cheaper to pay back its debts. It would also boost the economy and tax revenue by making American products cheaper around the world and luring foreign investors who build plants and buy real estate.


Cash-strapped Greece, by contrast, is tethered to a common European currency, the euro, and can't take advantage of a weaker currency. It's even worse for countries that owe money in another currency. Their debt payments go up if a currency they have borrowed in rises in value against their own.


Foreigners also like to own dollars, especially in times of crisis. That allows the U.S. Treasury to issue debt at low interest rates.


The U.S. debt burden isn't quite as heavy as it looks at first, either. The federal debt — $14.3 trillion — includes money the government has borrowed from itself, mostly revenue from Social Security. Take out the borrowing between government agencies and Uncle Sam's net debt drops to $9.8 trillion, or about 64 percent of GDP.


Some debt analysts consider Australia a model for the way it has controlled its budget and prepared to pay for an aging society. Over the last two decades, Australia cut government spending, imposed a 10 percent tax on most goods and services and sold off state assets including airports and railways. It also prepared to cope with an aging society by requiring employers to contribute toward a pension fund.


As a result, the Australian government's debts were equal to 14 percent at the end of the first quarter, lowest on AP's Global Economy Tracker.



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