Parties wrestle with cutting $500bn US budget deficit

Author: Andrew Balls

Published: July 19, 2004

The untold story of the Bush administration is the explosion of spending. That, at least, is the view of Roger Altman, top adviser to John Kerry and veteran of the Clinton administration.

Throughout Mr Kerry's campaign, the Democrat presidential candidate has criticised President George W. Bush's fiscal profligacy. Continuing the Clinton administration's ideal of deficit reduction, Mr Kerry has emphasised budget discipline throughout his campaign. As Mr Kerry's top economic adviser, Mr Altman, deputy Treasury secretary under Bill Clinton, is the person who will expound this policy.

"The Bush proposals to cut the deficit are not taken seriously by anyone I know in the business or financial community. Kerry's plan is taken more seriously."

In spite of different priori ties within their respective budget plans, Mr Kerry's and the Republicans' platform are surprisingly similar. Both aim to halve the deficit - estimated at $500bn (?401bn, £267bn) this year by the independent Congressional Budget Office - over four years. Both would extend most of the Bush tax cuts that will start expiring during the next term.

Mr Kerry promises to repeal tax cuts for those earning more than $200,000. This would help to fund further health coverage for the uninsured and reduce premiums for those in work, he says - so it would not contribute to deficit reduction.

At a forum on the election in Washington last month, Leonard Burman, a fellow at the Urban Institute, and Isabel Sawhill, head of economic studies at the Brookings Institution, said that there was essentially no difference between the two economic plans in terms of deficit reduction.

According to Ms Sawhill, even if the budget deficit is halved over the next four years, the extension of tax cuts and the likely reform of the Alternative Minimum Tax are likely to be running at $700bn-$800bn by the end of the decade. Both sides have said little about the long-term financing problems of social security and, to a greater extent, Medicare as the baby boomers start to retire in a few years.

Mr Altman argues that cutting the budget deficit is a pre-requisite for ensuring the long-term stability of social security and Medicare. He rejects the notion that the Democrat and Republican platforms are similar in terms of deficit reduction.

"One key difference between the Kerry and Bush budget programmes is that Kerry would reinstate the two key budget rules which America lived by during the 1990s. Kerry favours reinstating them. Bush opposes them."

In the debate over next year's budget, the White House says it supports reinstating rules whereby all spending increases must be offset by spending cuts. But it does not want to include taxes under the so-called Paygo rules, which compel new spending or tax changes not to add to the federal deficit.

The Kerry campaign calls for the rules to apply to tax and spending. However, the rules would not apply to extending the middle-class tax cuts that Mr Kerry supports - tainting the claim as fiscally conservative in the eyes of some observers.

Mr Altman argues that Mr Bush's fiscal plans are not credible - besides tax cuts, there has been a big increase in spending during his term. Mr Bush's pledge to halve the deficit rests on freezing discretionary spending outside defence and homeland defence, with no allowance for inflation.

The Bush campaign, in turn, alleges that there is a black hole of more than $1,000bn in Mr Kerry's fiscal arithmetic and criticises the lack of detail.

Robert Rubin, former Treasury secretary, who was deficit-hawk-in-chief during the Clinton administration, is also advising the Kerry campaign.

"You get hints that the Kerry administration would be one of fiscal austerity," says Eugene Steuerle, a fellow at the Urban Institute. "It is almost like during the campaign they cannot say they would spend less than Bush and they cannot identify who is going to have to pay more taxes to restore fiscal stability if the Bush campaign does not."

Even Tim Adams, head of policy for the Bush campaign, concedes that the eve of the Democrat party convention in Boston might not be the easiest time for Mr Kerry to stress his fiscal hawkishness. "Kerry has to satisfy his base before the convention and his base does not care about deficit reduction. It cares about spending. Maybe in September he will sound a bit more fiscally conservative."