Sunday, September 21, 2008

State of the Fisc

We just finished living through history this week. Seven days that changed the contours of American capitalism as it were. The American economy came to a tipping point - close to a credit freeze. Even as Treasury's desperate proposal of a $700 billion bail-out that essentially seeks to raise the ceiling on national debt to $11.3 trillion, awaits ratification, the crippling impact it will have on government finances is yet to be fully known.

How will this impact the expenditure of the government. Will this move see many justifiable social expenditure taking a back seat? After all, the headroom available for expenditure has now been squeezed because of the massive bail-out for financial institutions at large.

US government fiscal deficit :
2005-06 - $248 billion
2006-07 -$162.8 billion
2007-08 -$161 billion
2008-09- $407 billion (estimates)
2009-10- $438 billion (this figure will now balloon)

According to a report by the Congressional Budget Office dated September 9, the deficit is expected to rise from 1.2% of GDP in 2007 to 2.9% in 2008. The projected deficit for this year is more than twice as large as the deficit recorded for 2007, which was $161 billion, or 1.2 percent of GDP. After the final bail-out figures are frozen, the new bill may cost upto $1 trillion or 7% of the GDP.

Cost of wars - $858 billion
Cost of bail-out-$600 billion (Bear Stearns, AIG, F&F, money market funds)
Cost of total clean up - $500 billion to $1trillion (estimated)
Impact per capita $2000 (estimated)

A lot will depend on how the mechanism of the bail-out will manifest on government's balance sheet. Governments resorting to off-balance sheet exposures as an effort to keep fiscal deficit in check is common to developed and developing countries alike. But then, as one commentator, the fiscal profligacy of third world countries is childs play compared to what is unravelling around us. Also, bailing out poor farmers under a populist scheme may be less harmful than protecting greedy bankers who precipitated this systemic risk.

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