House vote on raising debt ceiling: Can spending cuts wait?

A House vote this evening on raising the federal debt ceiling will be mainly kabuki-like political theater. The GOP is expected to vote down the proposal, setting the stage for negotiations with Democrats later this summer.

But how soon should Congress act on deficit reduction?

One answer comes from a new report by the Peterson Institute for International Economics. Entitled “The Global Outlook for Government Debt Over the Next 25 Years,” the report suggests that lawmakers not make any big cuts until 2013-2015, or after the economic recovery is solid.

Congress should agree now, however, on long-term changes to Social Security and medical programs to reassure financial markets about US creditworthiness, it finds.

Here’s a big reason for at least agreeing to cuts without actually making them now:

“Under the baseline scenario, general government net debt in the United States is project to rise from 65 percent GDP in 2010 to 99 percent of GDP in 2020 and 213 percent of GDP in 2035.”

The report’s estimates are worse then the government’s projections because it factors in negative consequences on the economy from larger debt, such as inflation and higher interest rates.

The upshot? If nothing is done, the US will face a crisis sometime before 2035. But the crisis may come slowly, not in a sudden crash. For advanced economies like the US, there will likely be “a progressive strangulation of a nation’s wellbeing,” through hyperinflation or deep recession.

What complicates any study of US debt is the unique aspect that all advanced economies are suffering high debt at the same time. It’s hard to predict market reactions in that case.

This report, written by Joseph E. Gagnon and Marc Hinterschweiger, cited a 2007 study about historical motivations for wealthier countries to act on fiscal problems. That study found a government is almost three times more likely to act immediately after an election than as a result of a jump in the fiscal deficit.

What does that portend?

Congress may likely put off serious deficit reduction until 2013, after the next federal election – or about the time this report recommends real cuts kick in.