Tomorrow's taxpayers to pick up today's tab
By David Firestone
The New York Times
WASHINGTON -- When President Bush informed the nation last Sunday night on TV that remaining in Iraq next year would cost an additional $87 billion, many of those who will actually pay that bill were unable to watch.
They had already been put to bed by their parents.
Administration officials acknowl- edged the next day that every dollar of that cost will be borrowed, a loan that economists say will be repaid by the next generation of taxpayers and the generation after that. The $166 billion cost of the work so far in Iraq and Afghanistan will be added to what was already the largest budget deficit the nation has ever known.
With a force that has surprised even critics of the administration, the Iraqi occupation has pushed to the forefront a budget deficit that had previously existed mostly as an abstract red stain on Democratic bar charts. With no extra money available for the immediate future, choices are being illuminated on Capitol Hill -- choices between electronics-guided bombs and electrical grids, between low taxes now and lower retirement payments later.
The choices now facing politicians and policy-makers were hard to imagine when President Bush was inaugurated just 32 months ago, before the drastic turnabout of the federal budget. As the decade opened, the overheated economy of the 1990s had left the government flush with cash. There was a surplus of $281 billion in the budget that year, and the Bush administration, looking a decade ahead, predicted that a cumulative $5.6 trillion surplus would build up by 2011.
Bush vowed that almost all the national debt would be paid off and that retirement and health plans would be strengthened for the future by setting aside trillions of dollars in savings. Balanced budgets, so long in arriving, seemed to promise an end to wasteful interest payments and years of arguments pitting military spending against domestic programs.
And then, within months, the promises crumbled. The budget was upended by what economists now say were three independent forces gathering in power at once: a steep economic decline, a political consensus to slash taxes and the effects of the 2001 terrorist attacks. The surplus disappeared, replaced the next year with a budget deficit that has since grown to a record size. The $5.6 trillion surplus once predicted for the 10 years ending in 2011 is now a $2.3 trillion cumulative deficit under the best-case prediction issued by the Congressional Budget Office two weeks ago.
Historic dimensions: The $8 trillion difference between those numbers has little precedent in U.S. history.
The current fiscal year, which ends this month, was supposed to have ended with a surplus of $353 billion, the Congressional Budget Office predicted two years ago; now, the office says the year will end in a $401 billion deficit. Next year's deficit was projected to be $480 billion, but the new Iraq spending will bring that to $540 billion or higher -- close to the 5 percent of the gross domestic product that many experts warn is a serious danger zone for the economy.
It means spending battles over a variety of nonmilitary programs, from education to space flight to veterans hospitals.
The pressure is likely to get worse, particularly if the occupation of Iraq continues to consume $4 billion a month.
Joshua Bolten, the White House budget director, said in a recent interview that this coming year's 4 percent increase in discretionary spending might well be reduced below 4 percent in 2005, which would be far below the average recent increase for programs that are not entitlements.
The Congressional Budget Office issued an unusual warning in its forecast last month: If congressional Republicans and the administration get their wish and extend all the tax cuts now scheduled to expire, and if they pass a limited prescription drug benefit for Medicare and keep spending at its current level, the deficit by 2013 will have built up to $6.2 trillion. Once the baby boomers begin retiring at the end of this decade, the office said, that course will lead either to drastically higher taxes, severe spending cuts or "unsustainable levels of debt."
Economic worry: The long-term effect of the budget's imbalance was the reason the deficit was cited as the leading concern in a survey of economists last month by the National Association for Business Economics, surpassing even unemployment.
Economists in and out of government have begun studying the budget's plunge as a significant phenomenon in financial history, and reject that the deficit can be blamed on any single factor, such as the tax cuts or the terrorist attacks of Sept. 11, 2001.
The biggest reason for this year's deficit, they say, has been the recession, while the tax cuts and military-related spending will have a much greater effect on the long-term deficit. What has been remarkable, economists say, is that all three forces combined at once beginning in 2001 to utterly change the government's financial outlook.
"It really was the perfect fiscal storm," said Joel Prakken, chairman of Macroeconomic Advisers, an analytical company in St. Louis that developed the economic model of the country in use by many government agencies, including the Treasury Department. "So many different things all seemed to happen at once."
The initial problem, several economists said, was that the surplus was never as large as it seemed. The economy of the late 1990s was operating beyond its capacity, Prakken said, and the stock market boom generated so much quick wealth at the highest levels that the resulting tax revenue levels were bound to return to earth.
Bolten, previously the president's deputy chief of staff, challenged the notion that the administration had been hypnotized by the surplus numbers. He said the White House was aware of the economy's direction at the time of the first tax cut and intended it in part as a brake against further decline.
"The concept of an insurance policy was very much on the president's mind at that point," Bolten said, and concern about the deficit was secondary to reviving the economy.
He argued that the current-year deficit was still reasonable by historical standards as a percentage of the nation's economy, and said the administration believed the long-term deficit would be cut in half in five years.
The numbers make it hard to see how Bush's goal can be reconciled with his intention of extending the tax cuts when they expire. The deficit could be cut in half by 2006 if the tax cuts expire on their current schedule and spending is held to an average increase of 2.7 percent a year -- far below its current level of increase -- numbers in the budget office's forecast say.
But if the tax cuts are extended, even assuming that low level of spending increase, the deficit will not be cut in half until 2012, by which time the nation will have accumulated more than $3 trillion in new debt. |
