Federal Debt Ceiling Has Broader Implications for State and Local Governments

In this Edition of The Gallery, Robert Campbell, Vice Chairman and Principal from Deloitte discusses the high profile issues surrounding sovereign government debt and deficits in the G20; the debt ceiling debate in the US, and its impact on state and local government.

Throughout my travels around our country, I have met with many members of both the public and private sector to discuss high profile concerns over sovereign government debt and deficits. Over the past couple of months, I’ve had the opportunity to speak on this issue with corporate executives and government leaders in a variety of venues. What I have consistently heard is a heightened level of interest and concern from leadership on both sides over the continuing deficit spending and the accumulated sovereign government debt for the U.S. and other members of the G20.

The level of concern is increased by the current vocal debate around the U.S. debt ceiling. As you likely know, the U.S. is one of relatively few countries to have a statutory debt ceiling separate from the appropriations process. At present, our U.S. debt ceiling is $14.3 trillion and we are close to reaching that amount. Although the U.S. Department of Treasury has undertaken various short term measures, the effect of these measures will be to put off debt ceiling realization to approximately August 2nd, 2011.

Beyond August, we enter unchartered territory, as the federal government is not authorized to spend beyond that level. But what is not clear is what methodology and sequencing of actions would play in the event suspension of various payment and refinancing obligations becomes necessary. What could happen, if such an event is permitted to take place? One notable concern is the potential for negative market place reaction and higher interest rates if lender confidence in U.S. securities declines.

Additionally, U.S. state and local governments could be negatively impacted. Raising the debt ceiling could result in short term funding reductions in areas including Medicaid and education, which could have direct budgetary implications for state and local governments.

Whatever the outcome of the current debt ceiling negotiations, it is doubtful that a solution will result in the short-term, which will stabilize current debt in relationship to GDP. The difficulty of this effort could lead to only a temporary fix and deferral of more serious considerations of long-term budgetary issues until after the 2012 elections. If the debt-ceiling was raised at current spending levels by the spring of 2013 we would have an estimated $2.5 to $3 trillion added to our U.S. debt.

On a more positive note, there certainly are plans out there which if enacted could get the country on a better financial footing, in the long term. Last year, I was part of the Bipartisan Policy Center’s Task Force on the Federal Deficit. Our diverse and bipartisan group reported out a plan with unanimity, which would have the effect, if implemented, of stabilizing U.S. debt at the current percent of GDP through the foreseeable future.

Whether you agreed with the Task Force’s recommendations or not, to deal effectively with the myriad of issues in a more holistic manner, a plan would need to contemplate cost reductions, policy changes, revenue enhancements, as well as measures to stimulate the economy all taken together. We cannot simply cut spending or raise taxes to address this problem without also enacting a more comprehensive approach. Additionally, a holistic solution to stabilizing the debt is not possible without addressing Social Security, Medicare and Medicaid.

I think we can all agree that this is a time for leadership. I would encourage you to provide your perspective to your elective leaders, as the issue continues to receive heightened attention.

As always, I would value your comments and perspectives.

Mr. Robert N. Campbell III is Vice Chairman, Principal, Deloitte LLP and is the U.S. State Government Leader, based in Austin, TX

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