New Deficit Estimates Require Obama to Offer a Plan for Fiscal Sustainability
NO ONE LIKES to be the bearer of bad news -- especially when it could threaten your multibillion-dollar health-care reform bill. And so the Obama administration did not exactly rush to publish yesterday's required mid-session update to its federal budget estimates of last February. Still, once the numbers finally emerged in the dog days of August, they retained the power to stun: Instead of a cumulative $7.1 trillion deficit over the next decade, the White House now projects a $9 trillion deficit. These figures imply average annual budget deficits greater than 4 percent of gross domestic product through fiscal 2019, a rate of debt accumulation faster than projected GDP growth. This is not a sustainable fiscal path.
The extra $1.9 trillion in red ink mainly reflects the Office of Management and Budget's adoption of more realistic -- that is, more pessimistic -- estimates of economic growth and unemployment. White House officials protest that their original, rosier numbers made sense at the time; actually, plenty of forecasters, including those at the nonpartisan Congressional Budget Office, made more accurate calls. This situation was foreseeable and should have been acknowledged earlier.
The administration has a point when it argues, as budget director Peter Orszag did yesterday, that it inherited a terrible recession as well as a number of unpaid-for programs (prescription drugs, two wars) and tax cuts from the Bush administration. Mr. Orszag noted that more than half of the $9 trillion in projected borrowing reflects the impact of past policies. Almost two-thirds of the current fiscal year's $1.6 trillion deficit -- a postwar record 11.2 percent of GDP -- is attributable to the $700 billion financial sector bailout passed last October, and what has been spent so far under the $787 billion counter-recession stimulus package adopted in February. Both were unavoidable. Nor is this the time to slam fiscal policy into reverse; the economic recovery is too fragile.
Still, the Bush administration's irresponsibility notwithstanding, it is time to stop crying "we inherited it." The Obama administration needs its own clear, credible plan for restoring fiscal sustainability once the worst of the recession has run its course. Unless it can at least limit the growth in debt to the growth of the economy, investors will gradually lose faith in Treasury obligations, increasing the government's borrowing costs -- and turning a deficit crunch into a deficit spiral. In the worst case, unchecked debt could trigger a return to the double-digit inflation and interest rates of the late 1970s, only this time with massive U.S. obligations to foreign lenders such as China and Japan.
Mr. Orszag promised that next year's budget will include the proposed solutions that the administration has so far declined to articulate. Meanwhile, he said, it will continue pushing pay-as-you-go budget legislation. This is weak reassurance, since the administration's version of pay-go exempts the extension of the 2001 and 2003 tax cuts, patches for the alternative minimum tax and physician payment reforms under Medicare -- that is, most of the policies the administration complains about inheriting. The fact is that the administration supports the continuation of the prescription drug benefits -- which Democrats also advocated -- and continuation of the Bush tax cuts for 95 percent of taxpayers.
The new deficit numbers make it even more urgent that any health-care reform not only be fully paid for and certifiably budget-neutral in the eyes of independent analysts such as the CBO but also promise meaningful reductions in the cost growth of health care. So far, none of the plans under discussion measure up. The time is fast approaching for the president and Congress to face that reality, too.