A budget written in red ink

Author: Editorial

Published: February 1, 2004

Is there any serious concern in Washington about the federal government's fiscal condition? By that, we mean serious enough to recognize that hand-wringing is not public policy and that actual difficult choices must be made now and then by our elected officials? Anybody?

But really, it is time to get serious. On Monday, President Bush submits his new budget to Congress against a backdrop of good news and bad news. The good news is that the economy continues to grow robustly even though the fattening of employment rolls that usually accompanies an expansion has yet to materialize.

The bad news is the aforementioned fiscal situation -- that nasty business of budget deficits that we continue to raise in this space. The latest official citation comes from the non-partisan Congressional Budget Office. Its latest outlook suggests a deficit for the current fiscal year -- 2004 -- of $477 billion and a cumulative deficit over a decade of $1.9 trillion. This, by the way, is the "unified budget" that includes Social Security surpluses. Remove those surpluses, and the operating deficits rise to $631 billion this year and $4.3 trillion through 2014.

Bush and his top aides have said they want to cut the deficit in half over the next five years, at least as a percentage of the economy's total output; presumably, the president's budget will suggest how to get there from here. Whether it's persuasive or Wonderland is another matter. The president, for example, is expected to propose an increase in discretionary spending of 4%, compared with the CBO's estimate of 2.5%. Defense and homeland security spending would grow even faster, which means that Bush wants to contain the growth in other discretionary spending to less than 1%.

That may be possible, but not without a miraculous transformation in the appetite of Congress -- led by Republicans -- for favored projects and pork. And not with the cost of the new Medicare prescription drug bill on an upwardly revised trajectory -- $540 billion over a decade, according to recent reports, compared with an earlier price tag of $400 billion.

What's more, even if federal spending were flat-lined for a decade, the government would still be running deficits.

Then there's the revenue side. The president wants to make three years of tax cuts permanent, rather than permit them to expire over the next half-dozen years, as originally enacted. If that happens, and if discretionary spending increases modestly, and if the so-called alternative minimum tax is modified to prevent it from driving middle-income taxpayers into higher brackets, the deficit would explode, according to Brookings Institution economists William Gale and Peter Orszag. Their estimate: $5.5 trillion in the unified budget over a decade.

The president's budget is expected to forecast a deficit of $520 billion this year, even higher than the CBO's estimate. As we've argued, the problem isn't deficits in the short term, when there is still plenty of slack in the economy; the problems arrive when the economy is in higher gear. Douglas Holtz-Eakin, the CBO director and a former economic aide to the president, acknowledges the problem. Extending the tax cuts, he says, could hurt long-term growth because of a "cumulative corrosive effect on capital accumulation, on national saving and on productivity."

Put it another way: Long-term deficits in a full-employment economy raise interest rates, crowd out private capital and hinder economic expansion.

In short, difficult choices. Sure, restrain spending. But does anyone have the guts to look at the revenue side? Right.