Stabilizing U.S. debt is the greater of two G-20 challenges

As world leaders gather to discuss the global economy, demonstrators want their message heard.
By Lori Montgomery and Howard Schneider
Washington Post Staff Writer
Tuesday, June 29, 2010

An international push to cut deficits in half by 2013 may sound impressive, but the United States already is on track to meet that target without significant policy changes. The harder task for President Obama will be achieving a second goal adopted by the nation's largest economies over the weekend: stabilizing the soaring U.S. debt.

Official forecasts show the U.S. budget deficit plummeting as the economy recovers, tax revenue rebounds and spending on last year's economic stimulus package finally winds down. In January, the Obama administration predicted that the deficit would exceed $1.5 trillion this year -- the world's largest -- but dwindle to just over $700 billion by 2013.

Some analysts note that the Obama forecast assumes much stronger economic growth in 2011 and beyond than many analysts and the International Monetary Fund consider probable. But even the less optimistic Congressional Budget Office has predicted that the U.S. deficit would shrink from more than 10 percent of the economy this year to about 4.5 percent in 2013 under Obama's budget blueprint.

"The short-term goal is neither particularly ambitious nor particularly relevant. You get most of the way there just from the economy picking up," said Robert Bixby, executive director of the nonpartisan Concord Coalition, which advocates deficit reduction. However, to rein in the debt, Bixby said, "they really are going to have to get into undoing some policies that are popular."

As in other advanced economies in the Group of 20 nations, which adopted the deficit goals in Toronto this weekend, U.S. government spending is being driven inexorably upward primarily by health spending and social safety net programs for the poor and a growing population of old people. U.S. taxes, meanwhile, remain extraordinarily low by international standards; in the most recent ranking of 30 developed nations, the United States had the fifth-lowest tax burden, as a proportion of economic output. Only Mexico, Turkey, South Korea and Japan had lower burdens.

Obama has acknowledged that reining in the national debt, which now exceeds 56 percent of the U.S. economy's annual output, may require changes to Social Security, Medicaid and Medicare -- and to a "tax system that is messy and unfair," as he said Sunday in Toronto. But Obama has sought to postpone that reckoning until after this fall's midterm elections, creating an independent, bipartisan commission to develop a long-term plan to rebalance the federal budget.

In the meantime, Obama is making the same argument on Capitol Hill that he took to Toronto: The most powerful means of deficit reduction is a growing economy. If businesses make money and individuals get jobs, they all pay more taxes and seek fewer government subsidies.

To spur growth, Obama is seeking a fresh round of stimulus spending focused on supporting unemployed workers and shoveling cash to state governments to prevent layoffs of public employees -- two of the most efficient ways to channel money into economic activity and invigorate a sluggish recovery, according to the CBO and other independent analysts. And the administration has backed off less-efficient proposals, such as extending Obama's signature Making Work Pay tax cut. Unlike aid to the unemployed, which tends to flow to shops and landlords immediately, some portion of any tax cut is saved rather than spent.

Still, Congress is balking at the added expense in an election year, as Republicans accuse Democrats of out-of-control spending and as many rank-and-file Democrats struggle to justify an increase in already sky-high deficits.

Europe's pivot toward government austerity is helping to fuel the anti-spending mood in Congress. Highly indebted European countries are slashing spending with varying degrees of urgency, depending on whether they have come under pressure from bond markets, such as Greece and Spain, or are working to avoid it, such as Britain.

In the most extreme example, Greece instituted wage and job cuts and took other steps to immediately reduce its deficit -- steps that the IMF acknowledged would keep the country in recession and unemployment high. France took a more tempered approach, and was encouraged by the IMF in a recent study to do more. The agency praised a recent French decision to raise the retirement age to 62, but added, for instance, that the country needed "urgent" action to control health-care costs.

The new British government this month introduced a broad and highly contentious set of measures that would raise the value-added tax -- essentially, a tax on retail sales and other consumption -- and some income taxes, while freezing most public-sector wages and cutting public benefits.

In an interview, IMF Managing Director Dominique Strauss-Kahn said a desire to support growth is not inconsistent with the G-20's deficit-reduction goals. "Everyone has to look at fiscal consolidation, but they can do it at a different pace," Strauss-Kahn said. "It would be a disaster if all the countries were tightening. It would totally destroy the recovery. We need somehow today to go on supporting growth except for those who are really constrained."

Strauss-Kahn said the specific targets for when and how much to cut deficits are less important than whether countries "implement the right measures." In a report for the Toronto summit, the IMF encouraged nations to adopt "growth-friendly" policies as they seek to reduce deficits, for example by shifting from income and payroll taxes to consumption taxes. In the United States, that might mean adopting a value-added tax (or VAT) of up to 8 percent on all goods and services.

The idea of a VAT has been broached in Washington -- most prominently by Obama economic adviser Paul A. Volcker -- but has so far failed to gain political traction. Instead, the debate has focused on reductions in Social Security and health benefits, cuts in Pentagon spending and a freeze for other government programs

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