Can Bush cut the deficit in half?
Sure, some economists say -- as long as the economy keeps growing and Congress keeps the federal checkbook closed.
By Philipp Harper
Recently awakening from a fiscal lost weekend that lasted four years, President Bush has taken the pledge, promising to cut the federal budget deficit in half by 2008.
Can he do it?
Maybe. And if the economy cooperates, maybe more easily than most people imagine.
The larger question is: Will it matter? Can any short-term deficit reduction, however successful, be more than an exercise in futility given the entitlement tsunami that will roll ashore in a few years when millions of baby boomers begin to retire?
To stanch that kind of budgetary bleeding, serious structural changes must be made to programs like Social Security and Medicare. So far the appetite for even discussing such changes, let alone instituting them, is scant.
But first things first. In addition to trying to wrap up nine spending bills for 2005, lawmakers this week are raising the national debt limit by $800 billion to above $8 trillion -- to avoid the first-ever default on the nation's debts. Banks and insurers
check your credit.
So should you.
It is the third time the Bush administration has had to seek a higher debt limit, leading to some tension within Republican ranks.
The good news for the president, at least in the short term, is that the next four years offer the chance for relatively painless deficit reduction as long as the economy can maintain the momentum regained after several years of sluggish growth.
Can we sustain the growth?
U.S. gross domestic product grew at a better than 4% clip in fiscal 2004, and if it can maintain that pace for the next several years, the president may be able to achieve his goal of halving the $413 billion deficit rung up in 2004 essentially by doing nothing, says Stephen Moore, president of the Club for Growth and a senior fellow at the libertarian Cato Institute.
“I see no reason we can’t have 4% growth,” Moore says.
But others aren’t quite so optimistic. Jeremy Siegel, a professor of finance at the University of Pennsylvania’s Wharton School, says such a robust growth rate might be sustainable if accompanied by commensurate productivity gains and stimulative changes to the tax code, including revising the alternative minimum tax so it takes less of a bite from the middle class.
“I think it’s possible,” Siegel says, “though it’s a little bit on the high side.”
An important naysayer is the Congressional Budget Office, which projects a better than 4% increase in GDP for fiscal 2005, but sees growth averaging just 3% over the following four years.
If those projections are correct, then growth alone can’t be relied on to cut the deficit. Either taxes will have to be raised or federal spending cut. Since the president is adamantly opposed to the former, reducing spending appears to be the only game in town.
Fading hopes for fiscal restraint
Having to rely on the Bush administration to make hard spending choices does not inspire general confidence. Moore, for instance, while upbeat about the economy’s strength, is much less sanguine about the prospects for fiscal restraint.
“Bush has been pretty bad on the budget,” he says, “so I don’t have a high degree of confidence we’ll see the spending discipline I’d like to see.”
That’s why Moore endorses passage of a new budget act that ties spending growth to increases in inflation and population. During the first Bush term, spending grew at double that rate.
Holding increases in spending to between 3% and 4% a year through 2008 would slash the deficit $100 billion, Moore says.
If Moore is made skeptical by the Bush spending record, it drives others almost to despair.
Lack of will for spending cuts
“There’s nothing in the record of the Bush administration, or in what the president said on the campaign trail, that should give anyone optimism that he can come close to meeting his goal,” says Harvard economist Benjamin Friedman.
Dismissing a growth fix for the deficit as “pretty unlikely,” Friedman also speculates that any action on taxes will entail further cuts, not increases. “One view is that the tax-cutting constituency was an important part of the president’s re-election and is entitled to some reward,” he says.
That leaves spending cuts as the only possible remedy, but Friedman sees the administration lacking the will to make them. Military spending is off limits because of the war in Iraq, he says, and while there are proposals for restructuring the massive entitlements of Social Security and Medicare, there is no “appetite for tackling these.”
Nor is there any reason to believe the “remarkably small” part of the budget not devoted to defense and Social Security and Medicare will be held in check, not when the president, in his first term,“ signed a bill that doubled farm subsidies and showed no resistance to very padded highway bills.”
“The good news would be that the deficit does not get larger,” Friedman says. “It’s a tragedy because this is the decade we should have been running surpluses” in advance of the budget drain represented by soon-to-be-retiring baby boomers.
Over the next 30 years, the Concord Coalition estimates, the cost of Social Security and Medicare and Medicaid will grow from 8% of GDP to more than 16%, and the “resulting deficits and debt will eventually overwhelm the economy” unless there is significant realignment.
The pressure begins in earnest in 2008 when the oldest baby boomers reach 62 and become eligible to claim early Social Security benefits. So even if the president is able to reach his short-term deficit goal, it may amount to nothing more than a political triumph that has little impact beyond the four-year horizon.
Says Wharton’s Siegel: “You might have a good year in 2008 and then very bad years in 2009, 2010 and 2011.” |
