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Moody's Analyst: Fix the Entitlements

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The U.S. government has to do something about entitlement programs to get its financial affairs in order, rating analysts say.

Federal fiscal year 2012 starts Oct. 1.

The Obama administration has proposed increasing taxes on high earners after 2012 and freezing “discretionary spending” – such as spending on education, food stamps and financial services regulation.

Those proposals could provide some stability, but Congress and the administration already have put the country on track for higher deficits by agreeing to extend unemployment benefits, cut the Social Security payroll tax for 2 years, and extend the Bush-era tax cuts for 2 years, according to Steven Hess and other analysts at Moody’s Investors Service, New York.

As a result of those decisions, the deficit will increase to 10.9% of gross domestic product (GDP) in fiscal year 2011, from 8.9% in fiscal year 2010, and the deficit will still amount to 7% of GDP in fiscal year 2012, the analysts say.

Debt could to amount to 75% of GDP at the end of fiscal year 2012, up from 62% 2 years earlier, the analysts say.

The analysts also question how feasible it will be for Obama to impose new income taxes or freeze discretionary spending over a long period.

“The biggest long-term issues are entitlements,” the analysts say. “Medicare and Medicaid have the largest budgetary impact and a significant reduction of their long-term budgetary impact has not yet been addressed. Proposals for Social Security reform are also omitted from the budget. … Overall, therefore, the budget, while marginally positive, has not addressed the longer-term issues that would improve U.S. fiscal performance.”

- Allison Bell