Deeper Budget Cuts on the Horizon

Author: Terry M. Neal

Published: February 14, 2005

To get a scope on the extent of the federal budget problem, consider this:

The one-year budget deficit will be so large in the next fiscal year that if the government stopped funding everything except defense, homeland security and entitlement programs such as Social Security, Medicare and Medicaid, the nation would still be $75 billion in the red.

Put another way, if the government decided this year to eliminate every education, school lunch, public health, housing assistance, space exploration, medical research, environmental protection, highways, national parks and veterans program, it would still run a deficit in 2005.

That's because domestic discretionary programs that aren't associated with defense or homeland security make up only about 20 percent of the federal budget. President Bush proposes spending about $352 billion for those domestic programs this year. The estimated budget deficit is $427 billion. The difference: $75 billion.

For all of the White House crowing about holding down spending, it is clear the government is not going to be able to cut its way out of this deficit -- not without making drastic cuts that would completely redefine the role of the federal government.

The vast majority of government spending is for mandatory programs -- most notably Social Security and Medicare -- that have set spending formulas. Of the discretionary programs, defense spending has far outpaced spending on the social programs that the president is now trying to trim.

The president wants to eliminate or drastically reduce 150 programs. These cuts measure into the billions. The budget shortfall over the next decade is projected to run into the trillions. Bush's proposed cuts in fiscal 2006 only hint at the sort of cutting that may be necessary in the future.

William G. Gale and Peter R. Orzag of the progressive Brookings Institution wrote in a recently published article that Congress has three options to balance the budget by 2010: increase individual and corporate income tax revenue by 22 percent, or reduce all discretionary spending -- including defense spending -- by 72 percent, or eliminate 72 percent of all discretionary spending that isn't spent on homeland security or defense.

Making the Bush tax cuts permanent would exacerbate the problem, according to Gale and Orzag. By 2015, the options for balancing the budget -- based on current deficit projections -- would be to cut basically every government program other than entitlement programs by 96 percent, or keep the discretionary spending, cut Medicare by 60 percent and eliminate Medicaid.

Lefties aren't the only ones alarmed by the prospect of long-term deficits. But there are big differences in how Democrats and Republicans want to solve the problem. Many on the left say that it's going to take some combination of tax increases and spending cuts. Those on the right argue that the tax cuts must stay in place to ensure future economic growth.

Brian Riedl, the federal budget analyst for the conservative Heritage Foundation, said in an interview for my Yahoo Political Players series that making serious cuts to entitlement programs is the only realistic way out of this mess.

"In part because of retiring baby boomers, Social Security and Medicare are rising fast enough in a few decades, you would need the equivalent of a $10,000-per-household tax increase, in current dollars, just to pay for Social Security and Medicare."

In the short term, Congress will likely do nothing to get serious about the budget deficit. Democrats aren't likely to propose any significant budget cuts and Republicans will probably continue to insist on tax cuts, saying they will cause the economy to grow fast enough to erase the deficit.

In the long term, structural deficits of the sort the nation now faces have a detrimental effect on the economy. Among other things, they drive up interest rates while reducing capital investment and consumer spending. In the long term, the deficit will need to be reduced by some method.

Liberals and progressives argue that Republicans have replaced boasting about eliminating the Department of Education and ending the "welfare state" with reducing taxes to the point that there is essentially no choice but to make draconian cuts in the future. Privately, many conservatives have quietly agreed that cutting taxes now will eventually force major spending cuts and rein in big government.

Ironically, while even the most radical spending cuts wouldn't balance the 2006 budget, Congress isn't likely to pass even the relatively small cuts Bush has proposed. Members of both political parties have made it clear that many of the president's proposed cuts are dead on arrival.

For instance, Sen. Thad Cochran, a conservative Mississippi Republican who has supported all of the president's tax cuts, told reporters this week that he would fight the president's proposal to trim farm subsidies.

I called the senator and asked why.

"The budget suggests changes that would unfairly impose cuts on ag producers in the Southeast, leaving those from other regions virtually unscathed," he said. "It would reduce the payment to cotton and rice farmers and not reduce payment to others."

So I asked Cochran whether his resistance was indicative of the problem in Washington, where politicians seek tax cuts because they're popular, but refuse to bear any of the pain for doing so.

"No, you're wrong about that," he said.

Why?

Because, he said, he and other members of the Senate Agriculture Committee will certainly try to find the same amount to cut out of other programs.

Of course, someone will be there protecting those other programs as well.

"That's a very large problem," said the Heritage Foundation's Riedl. "Congress supports reducing federal spending in theory. But every member of Congress that I read in the newspapers says we should exempt my favorite program."