U.S. Plan to Cut Deficits Stirs Emotions

By Andrzej Zwaniecki Staff Writer

Washington - Warning Americans that "the moment of truth" has come, a presidential commission released a sweeping and controversial plan to reduce chronic U.S. budget deficits and slow the growth of the public debt.

The proposal calls for drastic cuts in defense and other government spending, the elimination of popular tax breaks and an increase in taxes most working Americans pay for social programs. If enacted, these measures would bring about $4 trillion in budget savings and keep the public debt slightly below the current 62 percent of gross domestic product (GDP).

The commission's proposal is far from enactment. The National Commission on Fiscal Responsibility and Reform, established by President Obama in February, needed support from 14 of its 18 members to get Congress to vote on its recommendations. Although more members than many experts expected voted for the plan, which was published earlier this week, the commission came three votes short of the necessary 14 votes during a formal vote on December 3.

Some congressional leaders and White House officials said they would support major parts of this or other deficit-reduction plans in their own budget proposals. But the deficit-reduction measures will face opposition from both the left and the right among U.S. constituents. Opposition stems from the fact that these measures would bring greater austerity, affecting the lives of most, if not all, Americans, and because they would curtail the reach of the government. The plan, or its parts, therefore may not necessarily become law, at least not in the near future.

"The solutions are painful. And there are no easy choices," said Erskine Bowles, a Democrat and former chief of staff to President Bill Clinton, who co-chairs the commission with former Republican Senator Alan Simpson.

BUDGET HORIZON DARKENS

In the short run, economists say, the United States does not face the risk of a fiscal crisis comparable to troubles experienced recently by Greece and Ireland. In the fiscal year that ended September 30, the budget deficit exceeded $1.3 trillion, or 9 percent of GDP, the second-largest shortfall in the past 65 years. But the Congressional Budget Office (CBO) blames most of the shortfall on the effects of the recession and the spending designed to revive the economy. In the next few years, the shortfall will shrink, the CBO said.

In the medium-term budget, conditions are projected to worsen. The public debt - different from the annual budget deficit, it is the total, accumulated shortfalls - will hit $20 trillion or close to 90 percent of GDP by 2020, according to CBO projections based on current law and policies.

With interest payments on the debt exceeding $1 trillion annually, or 20 percent of federal revenue, the cost of borrowing may go up and credit rating agencies may downgrade U.S. debt, according to William Gale of the Brookings Institution, a policy research group. Higher interest rates would hurt economic growth and further swell the federal deficit.

The current deficit-reduction plans derive budget savings from a mix of spending cuts and tax increases, with different weights given to each. From a strictly economic point of view, there is no formula for the best combination of the two, said Alan Auerbach, a professor of economics at the University of California, Berkeley.

"Deficit reduction is a political issue," he said. The balance between spending cuts and tax increases depends on how much value the public and its elected representatives place on the programs funded through the government relative to the economic cost of higher taxes, which is slower economic growth, he said.

According to Auerbach, to tackle long-term challenges, Congress and the president must focus on what is now mandatory spending for public programs: public pensions, known as Social Security; Medicaid, a health care program for the poor; and particularly Medicare, health care for the elderly. The cost of Medicare is projected to rise fastest, for demographic and other reasons, Auerbach said.

By 2035, federal spending overall is projected to go up to near 30 percent of GDP (from 20 percent in 2006), with these programs accounting for all of the increase. Paying for them - other things being equal - would require an enormous tax increase that would be damaging to the economy, according to economists.

Many economists argue that a politically viable plan to tackle medium- and long-term fiscal challenges would boost the confidence of consumers, investors and corporate executives in the short run. In the long run, lower interest rates and gains in efficiency stemming from austerity measures would lead to even faster economic growth, some economists say.

The governments of Germany and the United Kingdom have already taken steps to address their fiscal challenges with significant support from the public. In contrast, in the United States, only 4 percent of respondents in a recent CBS News poll said Congress should treat the budget deficit as a priority.

But those pushing for elements of the presidential commission's proposal to be enacted might point out that when the United States instituted austerity measures in the 1980s, the public mostly accepted them as necessary. They included many actions similar to those proposed today, such as a gradual increase in retirement age, the elimination of some tax exemptions, caps on discretionary government spending and stronger budget discipline. The result was that by 1997, the budget deficit fell sharply, and by 2000, thanks also to a booming economy, went to zero.

More information on the National Commission on Fiscal Responsibility and Reform ( http://www.fiscalcommission.gov/ ) and its proposal is available on the panel's website.

ENDS

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