Economy and Jobs Watch: Long-term Budget Choices

Several new reports have pointed to the weakness of the long-run U.S. fiscal situation. A wide range of observers -- from independent analysts to conservative think-tanks, from international aid organizations to congressional analysts, and even from the administration itself -- are all pointing to the fact that current tax and budget policy is not sustainable. (See links below).

Several new reports have pointed to the weakness of the long-run U.S. fiscal situation. A wide range of observers -- from independent analysts to conservative think-tanks, from international aid organizations to congressional analysts, and even from the administration itself -- are all pointing to the fact that current tax and budget policy is not sustainable. (See links below).

All long-range projections point to increasing pressures on the budget. The proper response ought to be to secure the revenue base of the federal government now in order to avoid both costly adjustments down the road and passing large debts to future generations. Yet there are indications that the Bush administration will continue to avoid this problem and even try to drive revenues below their already record-low levels -- at 16.5 percent of gross domestic product, federal revenue for 2003 was at its lowest level since 1959.

This dismal long-run situation was avoidable. Changes to tax laws in 2001 and 2003 represented huge windfalls to wealthy Americans, and only minor savings to the majority of taxpayers; and transformed record surpluses into record deficits. Over the next 10 years, forecasters are putting the 10-year deficit at between $5 and $5.5 trillion. (See Brookings Report, Table 1.)

The situation is even worse when you look forward to the next 50 to 75 years. The Bush administration’s own projections show deficits as a percent of GDP more than tripling by 2050.

Source: Office of Management and Budget

As we go forward, our values must guide the choice of tax and budget policy. According to an analysis from the Brookings Institution, the 75-year cost of the Administration's tax changes is more than the combined 75-year Social Security and Medicare shortfall. In other words, we had a choice between tax cuts primarily for the wealthy, or to make Social Security and Medicare financially secure for the next 75 years. (See Chart) Was this the proper choice? In light of the fact that polls continue to show that a majority of Americans strongly support Social Security and Medicare, this choice seems particularly misguided and irresponsible.

Source: Brookings

The Brookings Report concludes that "[f]ailing to address the nation's long-term budget gap seems especially misguided since sustained and substantial budget deficits may induce fiscal and financial disarray, with potential costs far larger than those presented in conventional economic analyses, and since such deficits reduce flexibility to respond to unforeseen events in the future. Yet many policy-makers appear to be insensitive to the longer-run risks to U.S. economic performance from sustained, large budget deficits. Indeed, the "hole" of long-term deficits appears to be deepening."

What others are saying:

Brookings Institution
Sustained Budget Deficits: Longer-Run U.S. Economic Performance and the Risk of Financial and Fiscal Disarray
Robert E. Rubin, Peter Orszag, and Allen Sinai

"The U.S. federal budget is on an unsustainable path. In the absence of significant policy changes, federal government deficits are expected to total around $5 trillion over the next decade. Such deficits will cause U.S. government debt, relative to GDP, to rise significantly. Thereafter, as the baby boomers increasingly reach retirement age and claim Social Security and Medicare benefits, government deficits and debt are likely to grow even more sharply.

The scale of the nation's projected budgetary imbalances is now so large that the risk of severe adverse consequences must be taken very seriously, although it is impossible to predict when such consequences may occur."

International Monetary Fund (IMF)
U.S. Fiscal Policies and Priorities for Long-Run Sustainability
Martin Muhleisen and Christopher Towe, Editors

"Although fiscal policies have undoubtedly provided valuable support to the recovery so far, the return to large deficits raises two interrelated concerns. First, with budget projections showing large federal fiscal deficits over the next decade, the recent emphasis on cutting taxes, boosting defense and security outlays, and spurring an economic recovery may come at the eventual cost of upward pressure on interest rates, a crowding out of private investment, and an erosion of longer-term U.S. productivity growth.

Second, the evaporation of fiscal surpluses has left the budget even less well prepared to cope with the retirement of the baby boom generation, which will begin later this decade and place massive pressure on the Social Security and Medicare systems. Without the cushion provided by earlier surpluses, there is less time to address these programs' underlying insolvency before government deficits and debt begin to increase unsustainably, making more urgent the need for meaningful reform."

Congressional Budget Office
The Long-Term Budget Outlook

"Unless taxation reaches levels that are unprecedented in the United States, current spending policies will probably be financially unsustainable over the next 50 years. An ever-growing burden of federal debt held by the public would have a corrosive and potentially concretionary effect on the economy.

..."If taxation is restricted to the levels that prevailed in the past, the growth of entitlement spending will have to be substantially reduced. Restricting the growth of outlays for defense, education, transportation, and other discretionary programs would not be enough to ensure fiscal sustainability.

"Likewise, economic growth alone is unlikely to bring the nation's long-term fiscal position into balance. Moreover, issuing ever-larger amounts of debt or dramatically raising tax rates could significantly reduce growth."

White House's OMB
Budget of the United States Government: Analytical Perspectives

"These long-run budget projections show clearly that the budget is on an unsustainable path, although the rise in the deficit unfolds gradually. As the baby boomers reach retirement age in large numbers, the deficit is projected to rise steadily as a share of GDP. Under most scenarios, well before the end of the projection period for this chapter rising deficits would drive debt to levels several times the size of GDP."

… the Analytical Perspectives continue...

"With pessimistic assumptions, the fiscal picture deteriorates even sooner than in the base projection. More optimistic assumptions imply a longer period before the inexorable pressures of rising entitlement spending overwhelm the budget. But despite unavoidable uncertainty, these projections show that under a wide range of reasonable forecasting assumptions resources will be insufficient to cover the long-run shortfalls in Social Security and Medicare."

American Enterprise Institute
Fiscal and Generational Imbalances

"Combining outstanding debt with future revenue shortfalls, they calculate the United States' "Fiscal Imbalance"--the amount of money that the federal government must have in hand today to sustain current tax and spending policies indefinitely--at a heart-stopping $44.2 trillion, considerably outstripping debt currently held by the public. Although policymakers prefer to ignore it, they do so at our peril: Because the government does not have an extra $44.2 trillion, it must raise an equivalent sum by dramatically increasing taxes or drastically reducing spending."

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