August 30, 2014

This "Victory" Is a Surrender

Judging by recent media reports, there is a growing belief in Washington that the best way to deal with the deficit is to “declare victory.” 

It won’t work.

The deficit problem is far from being solved and its lengthy shadow will hang over every other issue, including the economy, until a fiscal sustainability plan is in place.

To be sure, the deficit is coming down and that is good news. However, most of the improvement comes from a recovering economy, allowing expiring tax cuts to expire and assuming that improbable cuts in discretionary spending and Medicare provider payments will actually occur.

And even if all these things turn out as planned, the budget is still on an unsustainable track. We’ll need a lot more than a short-term declining deficit to declare victory. We’ll need a plan that doesn’t just bring the deficit down but keeps it down on a sustainable basis.

The core problem is not a cyclical deficit driven by the ups and downs of the economy but an underlying structural deficit caused by a mismatch between future spending promises and current tax law.

The Congressional Budget Office (CBO) estimates that under current law the deficit will bottom out at $378 billion in 2015 before turning higher again, reaching $895 billion by 2023. Meanwhile, as a share of the economy, the debt will reach a low of 70.8 percent in 2018 before rising again to 73.6 percent in 2023. Under current law, both the deficit and debt will continue to outpace the economy beyond the 10-year budget window.

The reason for this is not hard to figure out. While annual appropriations, including defense, have been capped, mandatory spending (entitlements) and interest on the debt continue to grow on autopilot, driven mostly by population aging and its concomitant steadily growing number of beneficiaries. Revenues are growing too, but not by enough to keep up with projected spending.

That’s not to say that legitimate questions about domestic investments, national security, safety-net improvements and tax reform must be set aside. None of these issues can be dealt with, however, as if the looming debt burden didn’t exist.

If we are going to increase investment in domestic or defense programs, we need to have a better sense of how stable Social Security, Medicare and Medicaid spending will be in the years ahead. Indeed, without cost-saving reforms in these three large programs all other spending will continue to be squeezed out.

Similarly, our revenue needs will be driven by our decisions on the size and scope of our spending programs. Making the tough choices inherent in tax reform without taking into account the spending trajectory does not make sense.  

If any big initiatives were to be taken up individually without regard to overall fiscal policy, it would signal that our political leaders had simply surrendered to short-term political temptations.

And, in any event, how likely is it that taking these issues up one at a time outside the context of a comprehensive package could ever muster the necessary votes for passage? In the end, there will have to be trade-offs and compromises.

It is true that the president, the House and the Senate have each presented budgets that would improve the current outlook. However, in the absence of any attempt to reconcile strong differences these budgets are merely partisan talking points. None of them will be enacted and so none of them is, alone, a solution.

Thus, the “declare victory” strategy is really a surrender to political fantasies. A comprehensive approach looking at all the government’s commitments and sources of income is still needed as much as ever.

Ignoring the deficit won’t make it go away.