Budget Office Warns That Deficits Will Rise Again Because Cuts Are Misdirected

From The New York Times:

As the White House and Congress careen toward another fiscal showdown, the nonpartisan Congressional Budget Office warned on Tuesday that President Obama and lawmakers have been cutting the wrong kind of federal spending as they try to avoid the unsustainable buildup of debt that is projected in the coming decades.

Annual federal deficits will continue to fall in the short term, the budget office reported in its yearly long-term outlook, because of the recent spending cuts in military and domestic programs and rising tax collections in a recovering economy. The report projected the deficit in 2015 to be equal to 2.1 percent of the economy’s output, or just one-fifth of the peak shortfall at the height of the recession in 2009.

But starting in 2016, deficits are projected to rise again as more baby boomers begin drawing from Medicare, Medicaid and Social Security — the fast-growing entitlement programs, which Democrats and Republicans cannot agree on how to rein in.

The accumulating federal debt, which averaged 38 percent of the gross domestic product for the 40 years before the 2008 financial crisis, would rise from 73 percent of the G.D.P. now — above what most economists consider an optimum level — to at least 100 percent in 2038.

Budget experts have been warning since at least the Reagan era that in the early 21st century, aging baby boomers will drive entitlement spending — chiefly for Medicare and Medicaid, and to a lesser degree for Social Security — to levels that will crowd out all other military and domestic spending. Interest on the debt will also be a major and growing expense.

What is different now is that the Republican-controlled House and the White House have been on a two-year run of deficit reduction that has resulted, because of their inability to agree on entitlement reductions and higher tax revenues, in deepening cuts in the budget areas that are not responsible for the projections of mounting debt. Those discretionary spending programs — which include things as varied as Pentagon weapons purchases, air traffic control, science and research, education and national parks — are being squeezed even as entitlement spending grows automatically.

The budget office said that by 2023, the annual deficit would rise to an estimated 3.5 percent of the G.D.P., which is just beyond the level that many economists consider sustainable in a growing economy. By 2038, it would be 6.5 percent.

Under a nine-year plan starting in the 2011 fiscal year, discretionary spending was already being reduced annually. But the across-the-board “sequester” that took effect in March, when Republicans and Mr. Obama could not agree on alternative deficit reductions, has pared domestic and military programs further, resulting in increasing layoffs, furloughs and service cutbacks.

Republicans have supported keeping the sequestration cuts in place rather than accepting Mr. Obama’s proposal for a mix of higher taxes on wealthy people and some corporations and cuts in future entitlement spending. And he has said he will not accept their alternative for deeper reductions in Medicare and Medicaid without tax increases.

Federal spending for the major health programs and Social Security will equal 14 percent of the G.D.P. in 25 years, double the level of the last four decades, the budget office projected. While federal revenues are projected to grow — to 19.5 percent of the G.D.P. by 2038, compared with the 40-year average of 17.5 percent — that rise is not enough to offset the spending for federal benefit programs.

In contrast with entitlement spending, discretionary spending for domestic and military programs by 2023 would fall to 5.3 percent of the G.D.P., from the 7.3 percent of this year — the lowest levels in about 70 years.

“Unless substantial changes are made to the major health care programs and Social Security,” the report said, “those programs will absorb a much larger share of the economy’s total output in the future than they have in the past.”

 

Neither party expects any such changes this fall as the White House and Congress seek agreements to meet two deadlines: financing federal operations after the start of the fiscal year on Oct. 1 to avoid a government shutdown, and increasing the nation’s borrowing limit to avert a default.

 

The budget office report emerged as House Republican leaders closed in on a decision on legislation that would finance the government through mid-December at the current levels, which reflect sequestration, and fully strip financing for the president’s health care law.

Michael Steel, a spokesman for Speaker John A. Boehner, cautioned that “no decisions have been made or will be made” until House Republicans meet on Wednesday.

But aides familiar with the decision-making said House Republican leaders were ready to bow to the demands of rank-and-file conservatives and put “defunding” the Affordable Care Act at the center of the coming fiscal showdown.

While Republicans and Democrats continue to talk past one another, the opposing Senate leaders — the majority leader, Harry Reid, Democrat of Nevada, and the minority leader, Mitch McConnell, Republican of Kentucky — agreed that the first move was up to House leaders.

Mr. McConnell suggested that, like House Republicans, he would take a hard line on extracting deficit reduction concessions from Democrats before agreeing to raise the debt ceiling. But Democratic leaders reiterated that they would not negotiate on a matter that they say is Congress’s responsibility: to cover the bills and pay the debts that it has already authorized.

“It seems like the only time the president is ever willing to address the question of deficit and debt is when we have some opportunity and some leverage to bring him to the table,” Mr. McConnell said, “and a request to raise the debt ceiling is one of those opportunities.”

Mr. Reid was equally dug in, especially against House Republicans’ proposals to hold the government financing or debt limit measures hostage to their demands to delay or defund the health care law. He noted that Republicans had blinked before.

“When it comes to holding the full faith and credit of the United States hostage,” Mr. Reid said, “only those with a loose grip on reality would expect a different result than we had last time.”

House Republican leadership aides say they still expect a vote this week or next on a proposal that would extend government financing at current levels, which reflect the sequestration cuts, and be linked to another measure to delay or defund the Affordable Care Act. But some conservatives are insisting that the attack on the health care law be part of the government financing bill, so that Democrats cannot ignore it.

That would force the Democratic-led Senate to vote to strip out the health law provision and send the financing measure back to the House. Then the Republican-led House would face a decision in the next two weeks: demand concessions on the health law and risk a shutdown, or pass a “clean” government financing bill largely with Democrats’ votes.

Some Senate Republicans are growing uneasy about the House’s hard line. Senator Lindsey Graham, Republican of South Carolina, said demanding that Mr. Obama undercut his own health care law “is a bridge too far.” He added: “At the end of the day, a shutdown, we own. Like it or not, we’re going to own it.”