Beware Greek Levels of DebtBy Congressman Joe Pitts
Last week the international bond rating agency Standard & Poor's downgraded the bond ratings of both Spain and Portugal and reduced the rating of Greece to "junk." The International Monetary Fund and European Nations appear close to an agreement to bailout Greece and prevent the nation from going into default, but over the next few years this could require payments of $150 billion or more.
How did Greece get here? An unhealthy business climate, lavish public pensions and benefits, and government accounting gimmicks are just some of the reasons.
One of the factors contributing to a poor business climate has been a high value added tax (VAT). Like most European nations, Greece has instituted a VAT on many consumer goods. Essentially, the VAT is a hidden sales tax applied at each stage of production.
Currently, the VAT on most products in Greece is 21 percent. Under new austerity measures enforced to win financial support, Greece will raise this tax to as high as 24 percent.
Despite income tax rates just above those in the U.S. and revenue from the VAT, Greece still is in way over its head because of spending. Higher tax rates do not make a government more fiscally responsible. In fact, the ease of raising the VAT tax has encouraged most European nations to rapidly expand the size of government in the past few decades.
Because raising taxes can only go so far, Greece has also cut back on pensions, benefits, and public employee salaries. Union resistance to these measures has led to violence in the streets and economic paralysis, further harming the Greek economy.
If you think the United States would be immune from such civic unrest, you have to look no further than across the Delaware River to New Jersey. Facing a huge budget deficit, Gov. Chris Christie (R) has pushed for a freeze in teachers' salaries. In response, a leader in the teachers' union posted a sarcastic prayer wishing for the governor's death. Teachers in Paterson, N.J. encouraged a student walkout that led to 17 arrests for disorderly conduct.
As Greece applied to be part of the Euro Currency Zone, they hid the financial health of their government from European neighbors and their own people. Even now, private accountants are calling into question the official Greek government analysis of the public debt.
Here in the U.S. we very recently saw a vigorous debate about whether government is covering up the true costs of new healthcare legislation. A favorable Congressional Budget Office score cited by proponents of the bill, only accounted for the first ten years of the program. While many of the bill's taxes start immediately, benefits don’t start until 2014. Greece shows us that you can only cover up costs for so long.
I think that Greece is a clear warning to the United States, one that we shouldn't take lightly. While the U.S. currently holds a AAA bond rating, another bond rating agency, Moody's, has warned that we could lose this rating in the coming decade.
By the end of the decade, the U.S. national debt could be near $20 trillion. Even if interest rates were to stay consistently low, we would be paying over $700 billion each year in interest payments. That's more than the federal budgets for homeland security, energy, education, and the wars in Iraq and Afghanistan in a single year.
Much credit has been given to President Obama for convening a debt commission to offer solutions. Unfortunately, I believe this falls far short of the leadership that we need right now. The commission needs to focus on spending cuts and not tax increases. I’m currently working with my colleagues to write a letter to the commission opposing new VAT taxes and supporting government restraint.
The President already commands an Office of Management and Budget with a staff of 500 experienced accountants and policy experts. Upon assuming office, President Obama could have easily directed his staff to construct a long-term plan to balance the budget. I wish we could hear directly from the President about his ideas to confront our budget crisis with spending reductions.
In the coming weeks, I'm going to work with my colleagues on the Republican Study Committee to release a balanced budget plan focused on reducing government spending. It might not appeal to all Democrats, but I hope that it's a starting point for a vigorous debate. There is no precedent for bailing out the world's biggest economy. The longer we wait to get our finances in order, the harder it will be.
Rep. Joe Pitts is a Republican who represents Pennsylvania's 16th Congressional District, which includes parts of Berks, Chester and Lancaster counties.
Originally posted at TONY PHYRILLAS
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