Other CRFB Papers

Reducing the Budget Deficit Requires More Than Just Health Care Reform

Roll Call | Sept. 15, 2009

 

On the current path, budget deficits will exceed $9 trillion over the next decade. This calls for a dramatic shift in the country’s budget policy. Both the economic downturn and the list of policies Congress is likely to pass have caused budget projections to deteriorate to the point where no one can ignore the warning signals these numbers are sending.

Even the most zealous deficit hawk would agree we should not try to reduce the deficit this year — or even next. The immediate priority should continue to be ending the recession. Attempting to balance the budget too soon could derail the recovery at the very wrong moment.

But Congress needs to work with the White House to immediately develop a credible plan to bring deficits down to a manageable level over the coming decade — beginning only after the recovery has clearly taken hold. An announcement of the plan itself would send reassuring signals to our creditors and financial markets. Similar efforts have worked around the world in past crises, where merely the announcement of a deficit reduction plan has helped to calm jittery markets and keep down interest rates, thereby bolstering a recovery.

Second, there’s the health care reform debate. Done right, reform could significantly improve the nation’s long-term fiscal picture; done wrong, it will make it radically worse. A $9 trillion deficit is a reminder that cost control — not the creation of an expensive new entitlement — should be the centerpiece of reform.

Thus far, none of the plans focus sufficiently on controlling costs. While no one knows precisely what changes will work or how much they will save, some of the most promising cost control measures include: increasing consumer cost-consciousness through larger co-payments and greater cost transparency; changing provider incentives to promote patient health rather than rewarding excessive procedures and services; and changing the special tax treatment of employer-provided health insurance which contributes to the over-consumption of health care.

The other necessary piece of fiscally responsible health care reform is scaling back the costs of any new and expanded coverage. Adding a trillion dollars in new spending is just not feasible given the budget challenges we already face. Instead we need to look at universal coverage as a responsibility as much as a right - those who can should pay their own costs, and we should better target the proposed government subsidies to those who need them most. A focus on catastrophic coverage would also help to scale back the bill.

Even at its best, health care reform alone will not be sufficient to deal with the country’s budget woes. Savings will likely not appear until a decade from now, and as the budget numbers show, the luxury of time is something we no longer have. Every area of the budget — from Social Security to defense to taxes — will have to be on the table to fix our fiscal problems, and a realistic plan to get the budget on a sustainable path will likely have to include a bit of pain for everyone.

Finally, the policies Congress is likely to pass would make the situation considerably worse. The largest culprits — extending the bulk of President Bush’s tax cuts, reducing the alternative minimum tax, and blocking the cuts in the scheduled physician reimbursements in Medicare — would cost nearly $3 trillion over the next decade – triple the amount health care reform is expected to cost.

Even given gaping deficits, policymakers are not proposing to pay for the continuation of these policies. They should. We could offset the cost of the tax cuts by broadening the tax base and eliminating many exemptions, deductions, and credits that run through the tax code. AMT reform could be funded with some of the auction proceeds from cap-and-trade rather than Congress giving the bulk of those revenues away. And the increased Medicare costs should be included in the overall cost of health care reform. If these changes aren’t worth the price, well, they shouldn’t be made. There just is no more room on the nation’s credit card.

What happens if we fail to alter the budget? At some point, lenders to the U.S. government will become so concerned about the state of our fiscal affairs that they will demand a higher return on their lending. That unwelcome increase in interest rates would both harm the economic recovery and increase the cost of the government’s borrowing, causing us to have to borrow even more and potentially setting off a vicious debt spiral. Budget changes are inescapable — let’s hope those changes result from politicians choosing to confront the fiscal realities rather than the markets forcing them to.

Copyright 2009, Roll Call

Wake Up, America! We Need a Fiscal Recovery Plan

Roll Call | July 22, 2009

 
With all the exhausting economic challenges America faces today, we all might be inclined to put the alarm clock on snooze and hope to dream it all away. But it’s time to wake up, America. It’s time for the president to map out a fiscal recovery plan to sustain our children, our grandchildren and our country’s future.

The current reality is bleak. Consumers aren’t spending; banks aren’t lending; housing prices are still headed down; and unemployment continues to climb. While it is too soon to know whether to heed them, calls for another round of stimulus are increasing.

 
At the same time, the country faces massive deficits from all the borrowing to help fix the economy, as well as longer-term budget imbalances driven by aging and health care costs. Realistic projections show the debt growing indefinitely, to unsustainable levels. The administration’s budget plan would add trillions of dollars to the debt, not even counting the money that is being used to try to fix the economy.
 
Managing the seemingly contradictory goals of providing the economy with sufficient stimulus, but doing so in a fiscally responsible manner, is quite a challenge.
 
The solution is to continue with stimulus policies as necessary, but at the same time, the president should immediately announce a plan to reduce the deficit and close the long-term fiscal gap. Announcing the plan today, though it would only be phased in once the economy is strong enough, would help the country regain its fiscal credibility and would also be critical for the recovery.
 
It would be premature and potentially damaging to begin significantly reducing our budget deficits and enormous federal debt as the economy struggles to find its footing. But continuing to borrow hand-over-fist with no end in sight also jeopardizes any economic recovery. Already, “bond vigilantes” have pushed up interest rates on fears over higher inflation or default from an unsustainable U.S. debt outlook. And our major foreign creditors, including China, Russia, Brazil, and South Korea, have publicly cautioned the United States about the huge debt buildup — an early sign that we may not be able to continue borrowing cheaply from them in the future. Higher interest rates — a likely outcome of ongoing large borrowing needs — threaten both to choke off recovery and to add to federal interest costs.
 
In light of massive government borrowing, it is now more critical than ever for the U.S. government to have fiscal credibility. During times of economic and financial crisis, we must work to minimize the cost of new borrowing and maintain the confidence of creditors, taxpayers and financial markets. Waiting too long to lay out a plan to put the budget back on a sustainable path, or adding more stimulus into the economy without explaining how the debt will be paid off in the future, will ultimately lead to a fiscal crisis with a sharp runup in interest rates as investors demand compensation for their fears of hyperinflation or default, or a rapid fall in the dollar as creditors seek less risky investments elsewhere. Once markets and investors have lost confidence in the United States, it will be extremely hard for us to get it back. Experience in many foreign countries, including those in the European Union, suggest that advance announcements of what economists call a “medium term fiscal consolidation plan” can help avert fiscal crises.
 
Once an economic recovery is on solid footing, the fiscal recovery plan should be implemented gradually. Any such plan would likely include changes to the largest entitlement programs, other areas of government spending, and the revenue side of the budget. Specific policies might include raising the retirement age, scaling down government entitlement benefits for the well-off, and eliminating government programs the Office of Management and Budget finds to be outdated or inefficient. Introducing real specifics to a realistic budget plan will not only serve to reassure markets and strengthen an economic recovery, but it will also offer the public a realistic understanding of what will be necessary to fix the disastrous budget situation we now face.
 
 

 

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