Budget politics threaten ten-year surplus forecast
By Daniel W. Gottlieb -- Purchasing, 11/4/1999
With the annual budget process once again mired in politics, the real danger is the threat to the forecast budget surplus in the next decade from slackening of fiscal discipline. What Congress doesn't do now to control spending and limit tax cuts will be magnified in the future. Principal among the spending pressures building into the next decade are rising entitlement costs (Medicare and Social Security) and "emergency" defense spending created by increasing U.S. military commitments abroad, such as Kosovo and Bosnia.Instead of taking these highly likely demands into account, the White House, Congress, and most presidential candidates are either acting or talking as if the surpluses of $2-$3 billion over the next decade are real money instead of projections that could change dramatically, based on what happens in future spending. The president, for example, has been proposing extremely costly Medicare prescription coverage that will be funded largely from general revenues; Republicans are looking for a $778 billion tax cut; and presidential hopefuls are pushing measures that would bust the present budget spending caps or reduce revenues.
At this point, the fiscal discipline displayed by Washington in the '90s looks headed for history. The pols nod to warnings from many economists, then they seem to forget them. Federal Reserve Chairman Alan Greenspan and the Congressional Budget Office (CBO) point out that the economic assumptions underlying the forecast of surpluses are subject to swift changes. Let's assume, however, that healthy GNP expansion will continue in the near term. But there's still danger that the surplus could disappear. Here are some CBO signals this could occur:
- Even if the spending caps in Congress's budget resolution are not broken (which they already have been), the surplus would slip $80 billion by fiscal year 2002 and nearly $220 billion cumulatively by 2009.
- "After 2010, the retirement of the baby-boom generation will pick up steam, bringing with it greater demand for Social Security, Medicare, and Medicaid benefits," easily reversing "the favorable fiscal forces that are operating today."
- The president's proposals for Social Security and Medicare reform would reduce the surplus over the next 10 years by nearly $1 billion.
Medicare looms as the biggest threat to the government's burden on the economy. Outlays for benefits are expected to more than double in the next decade, even without new benefits contemplated by President Clinton, according to the CBO. Instead of 2.5% of gross domestic product (GDP) this year, Medicare costs will nearly double to 4.9% in 2030. Medicare costs already exceed the take from payroll taxes. Reason: The diminishing proportion of people in the work force to retirees creates a widening gap between spending and revenues.
Add to these threats the fact that Congress' self-imposed budget caps on discretionary spending (outlays other than entitlement programs) are set to expire in 2002. If Congress starts increasing these at a modest 3%/year, then kiss the surplus goodbye, CBO says.
As budget realities begin to sink in, even members of Congress who are pining for an election-year tax cut trophy are starting to back off. With the FY2001 budget process starting next February, and Campaign 2000 picking up steam, the betting is that no one involved, not presidential candidates, the president, nor Congress will be talking much about the threat to the surplus and its major implications.
If the economy loses steam, however, and the surplus numbers start to nose dive, a new slogan in Washington may be, "It's the budget, stupid."
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