The Federal Budget Mess Made Simple


By Howard Gleckman Remember the budget surplus? Between last year's tax cut and the war on terrorism, it's shrinking rapidly. And that will have profound implications, not just for President Bush's short-term political agenda but, more ominously, for the government's ability to meet its long-promised future obligations. If revised projections prove remotely accurate, the consequences for baby boomers and their children could be far-reaching -- and painful.

The new numbers were reported last week by the nonpartisan Congressional Budget Office (CBO) and will be confirmed next week by Bush analysts, when the White House unveils its 2002 budget. The CBO projects that the 10-year surplus, thought just a year ago to be $5.6 trillion, has plunged to $1.6 trillion. And the black ink anticipated for this fiscal year has already begun to flow red.

To understand what's going on, let's lose all the zeros that make fiscal policy incomprehensible. Let's look at the federal budget as if it were the household budget of an upper-middle-class family.

SEE DICK WORRY. Say Dick and Jane are fiftysomethings with three kids and elderly parents. A year ago, thanks to the New Economy boom, they sat down and calculated that they would probably have a nest egg of $560,000 in 10 years. They were making headway in paying down their debts, which -- thanks to some profligate spending in the '80s -- topped $3 million. And last spring, they were confident enough that they bought a vacation home. It seemed like such a sweet deal -- it cost almost nothing upfront, and the big payments wouldn't come due for five years.

Unfortunately, over the past 12 months, things began to sour. Dick got laid off (Jane held on to her job), and there was that trouble with their Enron stock. Then, in September, after some nasty criminal activity in the neighborhood, they had to spend a bundle on a heavy-duty home-security system. By yearend, that $560,000 projection that looked so attainable last year had shrunk to $160,000. And their dream of eliminating their debt in six years? Gone with the wind. At this rate, by 2012, they'll still owe more than $1 million.

Tough year. But the real pain comes in a few years, when they've got to put the kids through college, pay for the care of their parents, and fund their own retirement. In losing their opportunity to get rid of debt today, they have lost the flexibility they'll need to borrow again when the major bills start coming due.

ACCOUNTING GIMMICKRY. That's roughly the mess Washington is in today. The short-term problems are obvious. Costs for homeland security and the war on terrorism, sagging revenues in the face of an economic slowdown, and the overhang of last May's tax cut have turned cash flow negative and thrown Washington back into deficit.

Some of these problems will probably fix themselves. The anti-terrorism campaign will actually be relatively cheap as wars go, less than 1% of gross domestic product. As the economy stabilizes, so will tax revenues. And with a bit of luck, the budget should be back in the black in a couple of years.

That is, as long as Washington continues to use Social Security payroll taxes to pay for other government spending. When the surplus started to balloon in 1999-2000, budgeteers thought they were through with that game. Now, the government has resumed its Enron-like accounting gimmickry, and the CBO figures it will continue for the rest of Bush's first term, through his hypothetical second term -- and even beyond.

BOOMER BOMB. Like Dick and Jane, lawmakers hoped to use higher payroll taxes to pay off their debt -- all $3.3 trillion of it. But by spending it or giving it away in tax cuts, Washington can no longer take the very important step of slashing its outstanding debt by as much as possible -- before the huge baby boomer liabilities come due.

Remember, the first wave of boomers will be eligible for Social Security in 2008 -- just six years from now. That's when America will really confront the consequences of exploding health-care costs, long-promised Social Security benefits, and a fast-growing elderly population. The unfunded price tag: a mind-numbing $10 trillion -- equal to the total output of the U.S. economy this year.

The government has only three ways to meet that liability. Cut benefits or raise taxes -- neither of which is in the cards at the moment -- or borrow the money. And a combination of bad luck and bad decisions has just made that last option a lot harder than we thought it would be a year ago. Gleckman is a senior correspondent in BusinessWeek's Washington bureau. Follow his views every Tuesday in Washington Watch, only on BusinessWeek Online


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