Big Promises Bump Into Budget Realities
Saturday, June 21, 2008
On the presidential campaign trail, Democrat Barack Obama promises to "completely eliminate" income taxes for millions of Americans, from low-income working families to senior citizens who earn less than $50,000 a year.
Republican John McCain vows to double the exemption for dependents and slash the corporate income tax.
To which the folks who monitor the nation's financial situation can only say: Good luck. Because, back in Washington, tax collections are slowing, the budget deficit is rising, and the national debt is approaching $10 trillion. Whoever wins the White House this fall, fiscal experts say, is likely to have a tough time enacting expensive new initiatives, be they tax cuts or health care reform.
Economists expect the deficit to top $400 billion when the fiscal year ends Sept. 30, rivaling the all-time high of $413 billion set in 2004. Meanwhile, Congress recently adopted a spending plan that projects a $340 billion deficit in 2009 -- a number likely to grow, lawmakers say, as the cost of the Iraq war rises, the economy weakens and the flow of revenue slows.
Against that dour financial backdrop, the next president will have to decide what to do with President Bush's signature tax cuts, which are due to expire at the end of 2010. Obama and McCain have both promised to keep at least some of them, but that would increase the deficit by $150 billion a year or more. Preventing the alternative minimum tax, or AMT, from expanding to the middle class would add billions more.
Meanwhile, the first baby boomers started receiving Social Security checks in January. Without major policy changes, Medicare and Medicaid are projected to devour half of all federal spending by 2050. But the more immediate problem is the depletion of excess cash in the Social Security trust fund, which has been used for years to cover a portion of the annual budget deficit. Government economists predict that the Social Security surplus will start shrinking in 2011 and dry up completely by the end of the next decade, exposing government-wide budget deficits of a magnitude not seen since Bush's first term.
In a new paper titled "Facing the Music: The Fiscal Outlook at the End of the Bush Administration," University of California at Berkeley economist Alan Auerbach and two co-authors from the Brookings Institution conclude that, if spending grows at historic rates, simply keeping the Bush tax cuts and halting the spread of the AMT would drive the budget deficit to $481 billion by the end of the next president's first term, or 2.7 percent of the economy. Subtract the cash borrowed from Social Security and other retirement funds, and it would be $796 billion, or 4.4 percent of GDP.
"It's a train wreck," said Rep. Paul D. Ryan (R-Wis.), a member of the House Budget Committee. "The government is making promises to people right now it knows it can't keep. And you have some candidates piling more promises on top, which are clearly unfulfillable."
Former House Budget Committee chairman Leon Panetta, who served as President Bill Clinton's first budget director, said the financial situation is "much worse" than it was in 1993, when Clinton was forced to abandon promises of a middle-class tax cut before he took office. Instead, Clinton wound up devoting his first State of the Union address to a plan that aimed to tame rising deficits with one of the largest tax hikes in history.
"It's worse because there are a huge number of crises out there that are going to confront the new president," Panetta said, citing costly wars in Iraq and Afghanistan alongside the rising cost of Social Security and Medicare. "We're looking at a $400 billion deficit this year with the economy in recession or near recession. The likelihood is that it's going to get worse. And the fundamental problem has been that there's very little willpower by Republicans or Democrats to confront the issue."
A commitment by congressional Democrats to follow pay-as-you-go budget rules could further complicate the next president's ability to pursue expensive initiatives.
Obama has not made balanced budgets a priority. Instead, he promises numerous tax cuts likely to make the situation worse, including subsidies for education, child care, homeownership, "savers" and people who work. Obama also vows to extend the Bush tax cuts for families who earn less than $250,000 a year. According to an analysis by the Tax Policy Center, a joint project of Brookings and the Urban Institute, his tax plans would deprive the Treasury of nearly $900 billion in his first term, and increase the national debt by $3.3 trillion by 2018.