Greece Shows What America Would Be Without More Borrowing

Greek citizens are rioting and attacking police, as in this photo, in protest of drastic budget cuts the EU and IMF have required in exchange for a financial bailout.
Greek citizens are rioting and attacking police, as in this photo, in protest of drastic budget cuts the EU and IMF have required in exchange for a financial bailout.

On May 2, Greece announced a deal to get a bailout from the European Union and the International Monetary Fund. But as part of the agreement, Greece needs to cut government spending in ways that are causing social unrest. That chaos could get so bad that Greece might decide it's better simply to forget about the bailout and "restructure" its debt.

If America was forced to take similar budget cuts, how many Tea Party members would celebrate?

According to the The New York Times, the EU/IMF bailout could total $160 billion. Greece will make budget cuts ranging from $40 billion to $53 billion each year so that by 2014 its budget deficit falls from the current 13.6% to below 3% of GDP. And this will mean recession in Greece for years: A 4% GDP contraction in 2010, a 2.6% decline in 2011, followed by anemic 1.1% growth in 2012.

Cuts in Pay, Pensions and Bonuses

These cuts and the ensuing tax increases will hurt the Greek population. Many of its people work for the government, and Greece's public sector employees will suffer further pay cuts, retired civil servants will lose part of their pensions and members of Parliament will say good-bye to their bonuses. Greece is also raising its value-added tax (VAT) from 21% to 23% and taxes on fuel, tobacco and alcohol will increase by roughly 10%.

This isn't going over well with the general public, which is protesting in the streets. According to the Times, "tens of thousands of Greeks took to the streets across the country Saturday. Some in Athens chanted 'No to the I.M.F. Junta!' -- a reference to the hated military regime which ruled Greece from 1967 to 1974."

If you're in the U.S. and have read this far, you may be wondering what all this has to do with America. To answer, it helps to know that the U.S. budget deficit to GDP ratio is 9.4% (an estimated $1.4 trillion 2010 budget deficit, according to the U.S. Office of Management and Budget, divided by $14.9 trillion 2010 GDP). If the U.S. couldn't borrow more money to pay off its debts, the IMF might require the U.S. to cut its budget deficit to Greece's 3% target in exchange for bailout funding.

Could the U.S. Cut $953 Billion?

To get the U.S. debt down to the 3% of GDP level, either GDP would need to grow much faster, or we would need to cut that deficit by $953 billion so it totaled a mere $447 billion. Where will that $953 billion come from?

I apologize, but to illustrate how painful such a cut would be, we have to look at some more numbers. Out of the $3.5 trillion in Federal government spending, only 39%, or $1.37 trillion, is considered discretionary. And of that, 22% (or $782 billion) is for defense, which many would consider mandatory.

If we cut all of the other 17%, or $588 billion, that's considered "other discretionary" spending, that would still leave an additional $365 billion in cuts required to get down to a $447 billion deficit. This would mean going after so-called mandatory spending. But where is there room to cut $365 billion? Do we slash Social Security's $678 billion or Medicare/Medicaid's $676 billion by 54%? Do we simply gut $607 billion in "other mandatory" spending by 60%?

Whatever political pain Greece is suffering now would be in the U.S.'s future if we ever lost the ability to convince other countries to lend us more money. The kind of budget cuts that Greece now faces are a painful preview to what the U.S. would need to do to get its budget deficit down to 3% of GDP.