Let’s continue our discussion of economic fault lines. This week’s topic is government spending. Last year, the economy was infused with a nearly $800 billion stimulus package. This gave help to state and local governments, funded public work projects, and helped troubled industries. Much of that money is due to run out just as state and local governments are nearing the end of their fiscal years and faced with budget-balancing. Lawmakers in several states are considering raising sales tax and property tax, and cutting government programs. At the same time, jobless benefits are starting to run out for some of the long-term unemployed, who are hitting the 99-week maximum. A million unemployed could have their benefits run out by the end of this year. This will not help our economy.
Congress has delayed approving more money to cover Medicaid costs for states. Medicaid, which covers more than 60 million people nationwide, is one of the costliest services states provide. And with the severe recession, more Americans have turned to Medicaid for assistance. State tax revenues were lower last year as well, so deep budget cuts will have to be made. The federal share of Medicaid was increased last year as part of the stimulus program, but this funding will run out at the end of December.
This could mean trouble for the economic recovery. Thousands of state, county and local government workers could be laid off in the name of budget-balancing. More unemployed workers will do nothing to help the economy. Thanks for reading.
Our discussion on economic fault lines will now cover the housing market.
During the first quarter, the housing market showed signs of improvement, thanks to government assistance like the $8,000 first-time-homebuyer tax credit and the Federal Reserve's purchase of more than $1 trillion in mortgages. Now that those programs have come to an end, what will happen to the housing market?
Already we have seen a drop in construction. Last month, home construction dropped 10%, to the lowest level since December. Applications for new building permits, an indicator for future activity, have also fallen to the lowest level in a year.
Foreclosures are still on the rise. A record 14.7% of mortgage loans in the 1st quarter were either delinquent or in foreclosure. Which means that people are still struggling to make payments. Locally we had 300 homes placed in foreclosure in Winnebago County last month, which puts us on pace for a yearly record, if this trend continues. Let's hope that this is a short-term trend.
We have entered into a difficult cycle where we need jobs to spend money, pay bills, and buy houses. With the job outlook being bleak, it may be some time before we turn around. It could take years before we see a turn in housing. However, the good news is that real estate is as cheap as it has been in years! Who would have ever thought that real estate which increased in value for 40 consecutive years would drop in value for now 3 years in a row?
In continuing with our discussion of economic fault lines, let's talk about consumer credit in the U.S. According to the latest Fed figures, it has been falling for the last seven quarters. Americans are reluctant to take on more debt without improvement in the labor market.
This trend means consumer purchases, which account for 70% of the economy, will be limited until households become more optimistic about the recovery. Credit-fueled spending appears to be a thing of the past. Consumers are saving more and borrowing less and they see excess debt as risky.
Banks are also nervous about lending. This makes credit financing more difficult for consumers and restricts the amount of money consumers can spend. The question that this brings up is how long will this credit tightening last? Currently, it does not look like there is too much change in sight. Small businesses are also affected. The SBA has run out of funds to guarantee small business loans, which makes them riskier for banks to hold. A lot of job creation comes from small businesses in an expansion.
Credit is tied to many aspects of the recovery. If credit continues its current tight trend, the economic rebound may be slowed up even further. Or we may be looking at a significant change in our economy where there is less credit available to both individuals and business! On the positive side, consumers are saving more and spending less...why can't the government do this?
This week we'll continue our discussion about Greece and its effect on the rest of the European Union.
Ireland and Spain have announced austerity plans of their own to reduce debt and cut budget deficits. The European Union has called on euro-member governments to crack down on debt, demanding tighter oversight to keep countries within tough deficit limits.
High unemployment and slow economic recovery are hindering the effectiveness of austerity measures. Governments will need to cut back on spending, raise tax revenues, or both.
You may be wondering how the United States compares. We hear about the national debt and budget deficit all the time in the news. So are we on the same path as Greece?
Probably not.
Greece's debt equals 115% of its gross domestic product. The United States' is 67%. And though the U.S. may be headed for financial problems of its own down the line if spending doesn't change, it is unlikely to get into the situation that Greece is in any time soon. One advantage of the United States is that it has control of its currency. If the United States needs to print more money, it has that ability. Greece is at the mercy of the European Union to make decisions about the money supply.
It seems in order for the global economy to recover, countries all over the world must make an effort to cut back on spending. Greece has about twice as much debt as the United States; it's not too late to turn this ship around, let's tighten our belts and improve our finances!
Greece is in trouble. The European Union recently agreed on a $146 billion bailout for the county to keep it from defaulting on its government debt. The 16 countries that share the euro currency agreed there was no other option but to rescue Greece from defaulting to keep the euro out of trouble. Other countries like Portugal and Spain are debt strapped as well.
How did Greece get into this mess? The short answer is years of unrestrained spending, cheap lending, and failure to implement financial reforms. The country held on to government programs that it couldn't afford, like a pension program that allowed workers to retire on a lifetime pension equivalent to 80% of their final salary. Also, tax evasion had become commonplace. The country had been hiding the severity of its mounting debt problems until the new Prime Minister was faced with a crop of government debt coming due and was forced to come clean.
Greece's national debt was reported at $415 billion. That's 115% of GDP. The Greek government initiated austerity measures that cut spending and government benefits, but current debts still remain. Investors feared a default that would threaten other eurozone countries.
The IMF, the world's lender of last resort, negotiated a nearly $1 trillion global emergency rescue package of standby funds and loan guarantees that could be tapped by eurozone governments in peril. This should help calm investors bring confidence back to the euro.
Is the United States far behind? Stop by next week and you will find out.
The state of Illinois is in a budget crisis. According to the Wall Street Journal, the state is expecting a nearly $13 billion deficit for the upcoming fiscal year. The latest count puts Illinois' unpaid bills at around $5 billion; is bankruptcy a real possibility?
Ratings agency Fitch, downgraded Illinois' municipal bond rating to A-. That makes Illinois the second-lowest rated state in the nation, after California.
Governor Pat Quinn recently unveiled a budget for the 2011 fiscal year that centers on what he calls "Five Pillars of Recovery". These are: creating jobs, cutting costs, strategic borrowing, continued federal assistance, and increased state revenues.
According to Quinn, cuts will be made through employee furlough days, renegotiated contracts, pension stabilization, in which the state is supposed to pay $5.4 billion next year and $10 billion the year after that, and services like home care for older adults, child care, and reducing community mental health services.
Education will suffer cuts as well. $1.3 billion will be cut from general state aid, student transportation, grants and universities. School districts across the state have already begun eliminating programs and teachers.
Governor Quinn has launched a website inviting everyday residents to make suggestions about the budget. I invite you to leave me a comment on what you think should be done in Illinois. Should further cuts be made? Should taxes be raised? Should we vote legislators out of office? I want to hear your thoughts.
Have you ever wondered how much you pay in taxes? And not just for your income taxes, for everything: property taxes, sales tax, school tax, and so on. How much is it all together?
When you combine federal, state, and local taxes, the average American has to work 99 days to earn enough money to pay for them. That's over a third of the time you spend working! According to the Tax Foundation, Americans have to work 32 days to pay individual income taxes, 25 days to pay social insurance taxes, 15 days to pay sales and excise taxes, 12 days to pay property taxes, and 15 days to cover all the rest. Americans will spend more on taxes in 2010 than food, clothing, and shelter combined.
Let's look at Social Security. The income subject to social security tax will remain the same in 2010 as 2009, at $106,800. That means you will have to pay Social Security tax of 6.2% on income you earn up to the limit.
The Tax Foundation puts together a handbook each year that breaks down average taxes by state. It shows everything from the average tax burden of each resident, to the average tax on a gallon of gas. Each category is ranked from highest taxes to lowest so you can see how states compare. Now you can see why people are angry over taxes. To view the handbook click here>>
Thanks for reading.
Tomorrow is tax day. Are you prepared? Don't forget to file your tax return on time. The penalty for filing late is 5% interest on the amount you owe for each month that you don't file, up to 25%. If you know you won't be able to complete your return on time, file an extension. You'll be glad you did.
Another reason to file your taxes is the tax refund. The vast majority of filers are due refunds. According to early data from the IRS, almost 90% of returns processed so far have resulted in a refund. And the average refund for 2009 has reached $3,036, which is $266 higher than last year. This increase is partly due to new tax benefits enacted in 2009. Among these were, the first-time home buyer credit, sales tax deductions on new car purchases, credits for homeowners who made their homes more energy efficient, and the first $2,400 of unemployment benefits were tax free.
These larger refunds have increased the number of households that end up owing nothing in federal income taxes. According to estimates by the Tax Policy Center, roughly half of households, or 71 million, will not owe any federal income tax in 2009. These households include almost all that earn up to $30,000 as well as half of households that earn between $30,000 and $40,000.
The top 1% of households paid 39% of all individual income taxes. And the top-earning 25% paid more than four out of every five dollars collected by the federal income tax! Let's all pay our taxes and thanks for reading.
The last few weeks we have been discussing what's coming in 2010. We've covered GDP, interest rates and finally the banking crisis. Today, we are going to discuss jobs!
Jobs. They are important to all of us. The national unemployment rate is currently at 10%. It has slowly risen this year and is projected to continue rising into the first half of 2010. Could we see 12%? Maybe. Hopefully not.
Locally in the state line area, we have seen our unemployment rate skyrocket way past 15% in both Rock and Winnebago Counties. I recently read an article that said that the national unemployment rate formula was changed in the early 1990's. The article went on to say that if we still used the old formula, we would already be at a national unemployment rate in excess of 15%. The change in the formula dealt primarily with no longer counting people who have given up looking for a job. This is a large part of the currently unemployed. These people have lost their jobs, are on unemployment and have at least temporarily given up looking for a new job. As they have given up, they are still unemployed. Jobs have now become our #1 economic problem.
Let's hope as the economy slowly comes out of the Great Recession jobs will grow and the unemployment rate drops. Jobs are essential to economic growth, and these jobs need to be private sector jobs, not government jobs!
Last week we talked about the ever-growing number of federal employees. This week we will discuss how the federal government is spending your tax dollars. Washington plans to spend approximately $34,000 per household this year, the highest level in American history. Here's a breakdown of how that money is being allocated:
The largest chunk, $9,400, will go to Social Security and Medicare. These costs are covered by payroll taxes, but are being steadily threatened as we 77 million baby boomers begin retiring.
Next, $6,300 per household will go to financial bailouts. This is in the form of the TARP program and dollars to sustain Fannie, Freddie, and the FDIC.
$5,900 will go to defense, which covers everything from military paychecks to operations in Iraq to the research and development of new technologies.
$4,700 will go to anti-poverty programs including Medicaid, food stamps, and child-care subsidies.
The next portion, $1,200 per household, will go towards interest on the federal government's $12.9 trillion debt. That's only about 3% of their total spending but it's 6.7% of what the U.S. government actually collects.
The remaining amount will be allocated to health research and regulation, highway and mass transit, justice administration, education, and all other federal programs.
Washington will collect about $18,000 in taxes per household in 2009. This means that the U.S. government is spending almost twice as much as they take in! Do you do that? So where is the remaining $16,000 coming from? That's what makes up the budget deficit, to be put on the shoulders of our children.