Deficits and Debt as Far as the Eye Can SeeBy and
The $3.85 trillion package of spending cuts and tax increases unveiled on Dec. 1 by the leaders of President Barack Obama's deficit-reduction commission is going nowhere legislatively anytime soon. First, 14 out of the 18 panel members must sign off on the proposal, and the prospects of winning that kind of supermajority by a Dec. 3 deadline seemed unlikely as Bloomberg Businessweek went to press. Even if that hurdle were somehow passed, the plan would then face a vote in Congress, which shows little appetite for tough choices.
Despite such odds, the report's co-authors, Erskine M. Bowles, former President Bill Clinton's chief of staff, and Alan K. Simpson, a former Republican senator from Wyoming, declared a symbolic victory for focusing attention on the policy choices facing lawmakers if they are serious about making a dent in the $13.7 trillion national debt. Less talked about is that no matter how aggressive the deficit-reduction plan (assuming one surfaces in the next couple of years), the U.S. will face a multidecade effort to get its finances in shape.
The Bowles-Simpson proposal wouldn't wipe out the annual deficit for 25 years. Representative Paul Ryan, a Wisconsin Republican who's in line to chair the House Budget Committee in January and who served on the panel, has his own budget road map that takes a half-century to get to a balanced budget. A separate panel led by former Congressional Budget Office chief Alice M. Rivlin that offered its own scheme last month wouldn't even project a date.
Bowles and Simpson offer a strict federal diet that would impose spending caps and salary freezes on the federal government. They would cut or do away with tax breaks such as the mortgage interest deduction and put in place lower rates for some individuals and companies. They also recommend cutting Social Security benefits, especially for higher-income retirees, and raising the retirement age to 69 by 2075. Medicare would be cut by more than $400 billion over nine years. Discretionary spending would be cut by $1.67 trillion while mandatory programs would be pared by $556 billion.
And that may not be enough, say deficit hawks. The current demographic and economic environment, they say, make it much harder to find a plausible path to a balanced budget than a decade ago, when stricter fiscal policies, a roaring economy, and lower defense spending after the end of the Cold War produced surpluses.
The biggest change is that the first baby boomers became eligible for Social Security in 2008 and will begin participating in Medicare next year. That makes it difficult to scale back the programs because lawmakers want to protect current beneficiaries while giving those approaching retirement time to prepare for changes. "This budget is screwed up so badly you can't balance it in the immediate future," Ryan says. Dick Durbin of Illinois, the Senate's No. 2 Democrat, says the problem is "pure demographics. Boomers are showing up old and sick and, as a consequence, costs are dramatic."
The Obama commission would shrink the deficit to 2.3 percent of the economy by 2015 and more in subsequent years. That would be a major improvement over what budget forecasters say would otherwise happen. The $1.3 trillion deficit for the fiscal year that ended Sept. 30 was 9 percent of the economy, according to the CBO. Debt, meanwhile, is currently forecast to climb to almost 90 percent of gross domestic product by 2020 from 62 percent now, according to the budget office.
If nothing else, the multiple proposals have made budget-cutting a topic of national conversation, even if budgets aren't projected to be balanced for generations—if then. When Republicans take charge of the House in January, political agreement with Obama and the Democratic-controlled Senate over fiscal probity is an unlikely prospect, predicts Stan Collender, a former congressional budget aide. "The mantra for next year is gridlock, stalemate and shutdown," Collender says.
The bottom line: Neither Obama's deficit commission nor the most hawkish budget-cutters would balance the federal budget for decades to come.