While global markets will breathe a sigh of relief now that the US government can re-open, the deal essentially kicks the day of reckoning a few months down the line. The heart of the crisis remains unresolved. While the Democrats want higher healthcare spendingObamacare is just one part of thisthe Republicans are unwilling to match this with corresponding increases in taxation levels or, more accurately, elimination of tax breaks. The way matters stand right now, the costs are spiralling. Just Medicare and Medicaid costs have risen from 1.8% of GDP in 1985 to 4.6% now and, together with social security, the Congressional Budget Office (CBO) projects such costs will rise from 7% now to 14% by 2038. This, though, could turn out to be an under-estimate since, in the case of Obamacare, the CBO has raised its estimates in 2010 from $944 billion of spending over a decade, to around double that right now. Even if you assume, as the CBO does, that other Federal spending will decline from now on, it is still looking at a deficit rising to 6.5% of GDP by 2038, a level higher than that ever between 1947 and 2008; and debt levels rising to over 100% of GDPin other words, the US will well be on its way to becoming a fiscal wreck.
While it is not clear what solution will emerge as the Democrats and the Republicans continue to slug it out, a sequester-type automatic solution is a better onewhile cutting government expenditure certainly imposes a cost on the economy, it removes the uncertainty over whether the government will even function.