We can’t go on like this

Vindicator Editorial: August 28, 2009 at 12:00a.m.

Just a decade ago, the Congressional Budget Office, apparently buoyed with confidence over budget surpluses President George W. Bush inherited from President Bill Clinton, predicted that fiscal year 2009 would end with a surplus of $710 billion. Visions of paying down the national debt, which then stood at about $4.5 trillion, danced in government accountants’ heads.

Then reality stepped in, in the way of a recession sparked by Sept. 11, 2001, tax cuts pushed by Bush and passed by Congress in 2001 and 2003, and unprecedented levels of spending for the wars in Iraq and Afghanistan and domestic programs, including an underfunded Medicare prescription benefit.

From surplus to deficit

Those and other factors resulted in a projected $710 billion surplus turning into a $546 billion deficit in fiscal 2009. During the Bush years, the national debt nearly doubled. The debt, as a percentage of Gross Domestic Project grew to 70 percent for the last fiscal year that Bush was solely responsible for and to 90 percent for the year Bush and President Barack Obama share.

Those are scaring numbers. But they are only a hint of what is to come.

The CBO is predicting that debt will exceed 100 percent of GDP in 2011, the first time that hurdle will have been cleared since the World War II years. And while Democrats and Obama can complain about the bad economic hand they inherited from a Republican Congress in 2007 and a Republican president in 2009, they own the numbers from this point on.

We editorialized for years as President Bush continued to submit budgets with deficits that were obviously on track to double the deficit during his years in office. The difference was that the Bush White House and the six years of Republican congresses he worked with wouldn’t acknowledge the handwriting that was on the wall.

The Obama White House acknowledges what appears inevitable given the trends — yet another doubling of the debt — but shows no inclination to do anything about it.

From bad to worse

While the Bush budget deficits were horrible, the Obama budgets could become catastrophic. For one thing, there is no reason to believe that there is a market for the levels of debt that are being projected. About a third of the debt — $3 trillion, — is held by foreign interests. Of that, China holds 24 percent and Japan holds 20 percent. The United States can’t bank on either country maintaining its level of investment in U.S. securities, and certainly can’t anticipate a dramatic increase.

That makes financing the enormous increase in debt a problem that has the potential for increasing interest rates, decreasing the value of the dollar and severely impacting the economy.

While the White House can claim he high ground for candor in acknowledging the ugly numbers that lie ahead, that’s little help. The president and Congress have to find a way of reversing a potentially disastrous course. The days of borrowing and spending can’t be maintained.

The budget deficit has not figured recently as a major issue in Washington or on the campaign trail, as it did in the 1980s and ‘90s. Bush inherited a surplus in 2001, but his tax cuts, the slowing economy early in his administration and a massive defense buildup turned the surplus into red ink, with the deficit hitting a record $413 billion in 2004. In recent years, the deficit has fallen as tax revenues jumped with the improving economy.

Nussle acknowledged that the deficit will grow to $410 billion in the current fiscal year. But he cast that largely as a result of the stimulus plan, which is expected to cost about $146 billion, and he noted that the deficit is low in historical terms, as a proportion of the economy.

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The September 2008 CBPP analysis found that 42 percent of the “fiscal deterioration” that has occurred under the Bush administration is a result of “tax cuts,” compared with 40 percent that is due to “[i]ncreases in military and other security programs”:

The federal budget is projected to run a $546 billion deficit in 2009, compared with the $710 billion surplus that budget experts projected for 2009 back when President Bush took office nearly eight years ago. This $1.3 trillion deterioration in the nation’s fiscal finances for 2009 can be seen by comparing estimates that the Congressional Budget Office (CBO) released this week with those that CBO released in January 2001.

[...]

The dominant factor in the unprecedented fiscal deterioration thus was not the performance of the economy. Nor was it increases in domestic programs. The key factors have been large tax cuts and increases in security-related programs. For fiscal 2009, some $1 trillion of the $1.3 trillion deterioration in the nation’s fiscal finances stems from policy actions, and tax cuts account for 42 percent of this $1 trillion deterioration. Increases in military and other security programs account for another 40 percent of the deterioration. [emphasis in original]

p) (ATTN: National, Financial editors)

(updates throughout)

//Deficit Forecasts Balloon with New Programs// (Washn)

By Lori Montgomery

WASHINGTON — The nation would be forced to borrow more than $9 trillion to support President Obama’s initiatives and other federal programs over the next decade, the White House said Tuesday, a sharp increase in projected deficits that provided fresh ammunition to critics of the president’s sweeping proposal to expand health coverage to the uninsured.

In their traditional summertime budget review, administration officials acknowledged that they relied on overly optimistic assumptions about the economy when they forecast in March that Obama’s budget plans would generate deficits of $7.1 trillion over the next 10 years. After factoring in the severity of the recession and the prospect of a more sluggish recovery, the White House concluded that the budget outlook is significantly worse.

White House budget director Peter Orszag played down the grim forecast as unsurprising, saying the update merely brings White House projections in line with those of outside experts. He noted that this year’s deficit is now expected to approach $1.6 trillion — the highest on record and the biggest as a percentage of the economy since the end of World War II, but slightly smaller than officials had feared.

Still, with town hall meetings across the country erupting with bitter complaints about rising federal spending and the fear of greater government intrusion into people’s lives, the new deficit projections are likely to complicate Obama’s ambitious legislative agenda when Congress returns to Washington in September.

Republicans seized on the new forecast, arguing that a nation so deeply mired in red ink can ill afford an overhaul of the health-care system projected to cost as much as $1 trillion over the next decade. Though Democrats have vowed to pay for health reform with spending cuts and tax increases, the packages so far under discussion would drive up future deficits by $240 billion or more.

“Americans are deeply shaken — and increasingly angered — by the explosion of spending and debt coming from Washington,” said Rep. Paul Ryan, R-Wis., the senior Republican on the House Budget Committee. “If we continue to pursue this policy of Washington as the answer to every problem, it will cost Americans far more than the obvious burdens of ever-higher taxes, interest rates, inflation and debt. It will cost us the freedom to run our own lives.”

Added Rep. Dave Camp, R-Mich., the senior Republican on the House Ways and Means Committee: “If the House Democrats’ unaffordable $1 trillion health-care bill wasn’t dead before, it should be now.”

Orszag said the president will press forward on health care despite the yawning budget gap, arguing that reform is essential to reining in the skyrocketing costs of government programs such as Medicare and Medicaid, which threaten to drive deficits even higher as the baby-boom generation retires.

“I know there are going to be some who say that this report proves that we can’t afford health reform. I think that has it backwards,” Orszag told reporters. “The fiscal gap is precisely why we must enact well-designed and fiscally responsible health reform now. ... Given the long-term nature of that problem, we simply can’t afford to wait.”

Orszag acknowledged, however, that health-care reform alone cannot solve the nation’s budget problems, and he said deficit reduction will be “a top priority” when the president presents his next budget proposal to Congress in February.

As the White House released its budget update, the nonpartisan Congressional Budget Office released a similar report Tuesday, confirming the administration’s projection that this year’s deficit will soar to nearly $1.6 trillion, about 11.2 percent of the overall economy and more than triple last year’s deficit of $459 billion. The chasm is almost entirely the result of the severe downturn, the CBO said, which produced the sharpest drop in tax collections since the Great Depression and the biggest increase in spending since 1952, at the height of the Korean War.

Still, this year’s deficit is lower than officials expected, thanks in large part to reduced spending on the bailout of financial firms. The Troubled Assets Relief Program cost $133 billion this year, the CBO said — about $200 billion less than previously projected.

Both the White House and the CBO said the recession should end in a few months, and the CBO credited the $787 billion stimulus package President Obama signed in February with hastening the rebound. But congressional economists are predicting “a relatively slow and tentative recovery.” Christina Romer, chairman of the president’s Council of Economic Advisers, said the unemployment rate is likely to hit 10 percent later this year and remain there through the first part of 2010.

As a result, government spending on social programs will continue to soar while tax collections lag behind previous expectations. Deficits are likely to remain elevated even after the economy recovers, averaging more than $800 billion a year through 2019, when the White House forecasts that the annual gap between spending and revenue will be $917 billion.

Deficits of that magnitude would require dramatically more government borrowing from China and other creditors, driving the accumulated national debt to nearly $23 trillion in 2019 — or 76.5 percent of yearly gross domestic product, the highest proportion since 1950, the White House said.

Given the more pessimistic economic outlook, the CBO also predicted larger budget deficits in the coming years, increasing its 10-year forecast by $2.7 trillion. Because the CBO report analyzes the effects of current law — and does not factor in Obama’s budget proposals — it cannot be directly compared to White House figures. But independent budget analysts said a fresh CBO analysis of Obama’s policies would probably look even worse than the numbers Orszag released Tuesday.

The simultaneous release of the two budget updates came amid a flurry of other economic news, including the president’s announcement that he would reappoint Ben Bernanke as chairman of the Federal Reserve. Last week, officials also released some of the banner numbers from the White House deficit projections, fueling speculation that the administration was hoping to distract attention from the increasingly alarming fiscal picture.

“It’s ironic that an administration that promised openness and transparency is playing a desperate and cynical game to hide these jaw-dropping deficit numbers from the American people,” said Antonia Ferrier, a spokeswoman for House Majority Leader John Boehner, R-Ohio. “The icing on the cake was the decision to renominate Ben Bernanke simultaneously as well.”

But Kenneth Baer, a spokesman for the White House budget office, said the timing was purely coincidental. He said that “it happened to be that this date was the best date” to release the new deficit numbers.