WASHINGTON – The United States is spending more money that it should,and balancing the budget to recover from the large deficit will require some unpopular measures,the authors of a new report said Wednesday.
Economists Alice M Rivlin and Isabel V. Sawhill,both senior fellows at the Brookings Institution wrote the study,“Restoring Fiscal Sanity: How to Balance the Budget.” It argues that the deficit matters more than before,and that better policies are possible and needed urgently.
The authors believe that large deficits weaken the economy and lower family incomes.
The federal government is spending about $500 billion a year more than it raises in taxes. That gap that will expand to near $700 billion a year by 2014 and will continue to accelerate,“as the baby boom generation begins to retire,” said Rivlin at a panel discussion about the report.
“What we are worried about is that these deficits are not temporary,” said the economist.
Pointing out that less than three years ago the federal budget was running a surplus of $127 billion,the report explains that the bonanza is over. The authors blame the Bush administration tax cuts,a weak economy,government spending increases and a lack of concern for fiscal discipline.
If it weren't for surpluses in Social Security,Medicare and federal retirement programs,the final deficit estimate would exceed $1 trillion in 2014.
Rivlin said the gross domestic product would have to grow by 4 percent annually to achieve a balanced budget.
“We've had this from the early 1990s,but counting on it for a whole decade is a stretch,” Rivlin said.
Rivlin also said that passing large and unnecessary fiscal burdens to future generations is unfair and irresponsible. The deficit will eventually slow economic growth,increase household borrowing costs,require a growing proportion of income be devoted to paying interest on the national debt and raise indebtedness to foreigners,she said.
A major problem is that it foreigners lose confidence in the nation's economy,they might reduce their U.S. investments. The value of the dollar would then decline,and prices paid for imported goods would rise.
“I think there is also a risk … that the international markets would lose confidence in our currency because of our long-term fiscal regime,and also because of our large current account deficits,which as you all know,are partly a function,again,of our fiscal ill discipline,” said former Treasury Secretary Robert E. Rubin,now with Citigroup Inc.
Rubin said there is a risk that the international markets will demand sharply higher interest rates. “Repairing this fiscal mess is extremely difficult,but the longer we wait,the deeper the hole,” he said.
Both deficits and rising interest costs are likely to put downward pressure on government spending for education,nutrition and health care,according to the report.
Rivlin and Sawhill,with a large team of experts,came up with three ways of balancing the federal budget over the next 10 years – all involving some tax increases.
“We don't expect everybody to buy our particular answers; indeed we will feel delighted if we start a more vigorous debate and lots of counterproposals” said Rivlin.
The “smaller government plan” would balance the budget primarily by cutting $400 billion in domestic spending. It proposes raising the gas tax by $134 billion and doing more to enforce existing tax laws.
“You can't get from where we are in the balance without new revenues; anyone who believes this should show specifically how it could be done,” said Sawhill.
Former congressman John E. Porter,R-Ill.,now a lawyer at the Hogan & Hartson law firm said that if he had been in Congress the past few years,he would have voted against the tax cuts.
“These messages are good politics,but frankly they are not good policies,” Porter said.
He emphasized that the deficit can't be solved without spending cuts.
Announcements such as the president's proposal to send men to Mars only make “the public think that we can afford anything. I think it will go away after the elections,but it's still the wrong message,” Porter said.
The “larger government plan” would scale back the 2001 tax cuts that benefited the affluent,eliminate the Social Security earnings ceiling so that all wages would be taxable and create a new value added tax,essentially a national sales tax,that would affect every American.
The third alternative,the “better government plan” emphasizes making government more efficient through reorganization and mixes elements from the other two proposals. Sawhill said this plan is more likely to be acceptable politically to both Republicans and Democrats.
“It's difficult to make the public focus on taxes and the debt. Unless the Americans feel it affects them personally and directly,they won't focus how wide our deficit is,” Porter said.
“Many of these actions will be unpopular,so the public very much needs to be convinced that deficits are sapping our national strength and undermining their own and their children's well being,” Sawhill said.