Washington's Deficit Plan? Nada

By Howard Gleckman Waiting for Washington to get the deficit under control? Pull up a chair and relax. It's going to be a while.

Despite annual deficits that are approaching $400 billion -- and that will explode as the baby boomers begin to retire over the next decade -- Washington seems unwilling to take action. There are only two solutions: raising taxes or cutting spending. Lawmakers will do neither.

Despite their brave talk about the need to control the red ink, President George W. Bush and Congress are marching in the opposite direction. At Bush's urging, lawmakers are about to approve an additional $80 billion to fund the war in Iraq for 2005. The House has voted to repeal permanently the estate tax -- at a staggering 10-year cost of nearly $1 trillion. Congress is abandoning a White House request to trim farm subsidies, and lawmakers are balking at modest cuts in Medicaid.

"UNSUSTAINABLE PATH." By the time Washington is finished with this year's fiscal follies, the President and Congress are likely to add $150 billion or more to the deficit over the next five years. "Deficits are back as an issue, but they are not being taken seriously," says Robert Bixby, president of the Concord Coalition, a nonpartisan group that lobbies for fiscal prudence. "They are going backward."

You don't need a green eyeshade to understand the long-range problem. Today, as a percentage of the economy, federal tax revenues are at 50-year lows -- only about 16% of gross domestic product. But spending is humming along at 20% of national output.

And that's just the beginning of the problem. As the boomers age, three government programs -- Social Security, Medicare, and Medicaid -- will suck up a mind-boggling chunk of the income the nation produces. In just two decades, those programs alone will eat up every dollar of anticipated tax revenues. Without new revenues, that leaves nothing -- not one penny -- for national defense, homeland security, preservation of national parks, or to pay the interest on the debt the nation is racking up. Even Federal Reserve Chairman Alan Greenspan, who gave the green light to big deficits in early 2001 when he put his stamp of approval on Bush's tax cuts, told the Senate Budget Committee on Apr. 21 that the budget is "on an unsustainable path."

AXING MORE TAXES. For a good description of the mess, as well as some solutions, take a look at a new Brookings Institution study called Restoring Fiscal Sanity 2005. That's the environment in which lawmakers are working. In recent weeks they've been scrambling to reach a deal on a budget resolution that will set a fiscal framework for 2006. But of the Big Three, Medicare is off the table for now because both parties are leery of touching it. Social Security reform is explicitly exempted from the budget debate, and any overhaul Congress agrees on is likely to add to the deficit. That leaves Medicaid.

The budget agreement has been stalled by a battle over how much to trim the joint state/federal health program for the poor. Bush and the House want to trim $20 billion from planned Medicaid spending over five years -- about a 2% reduction. But the Senate has balked. If lawmakers agree at all, they'll split the difference at roughly $10 billion.

But that would be far from enough to reduce deficits. That's because the House and Senate have no quarrel over taxes: They'll cut them by at least $70 billion over the next five years -- mostly by extending the 15% rate on capital gains and dividends through 2010. Plus, if they reach a deal on the estate tax -- which would be passed outside of the budget framework -- deficits will explode.

WHAT BIPARTISANSHIP? Even without the estate tax changes, the budget is likely to boost deficits by $150 billion or more over the next five years. "It is fantasyland up there," says James Horney, a former top Senate Democratic budget aide.

Some lawmakers hint that Congress could reopen Medicare, even though it was just two years ago that Washington added a fabulously expensive drug benefit to the senior citizens' health program. The trouble is that Congress could end up making the program more costly. A provision in the 2003 law trims the amount of money doctors are reimbursed for caring for Medicare patients. Now the docs are gearing up for battle. If they succeed in getting the cuts rolled back, add at least $10 billion to the deficit.

The biggest problem by far remains taxes. Earlier this year deficit hawks such as Senate Budget Committee Chairman Judd Gregg (R-N.H.) were willing to combine spending reductions with a freeze on new tax cuts. But they were overruled by the White House. Thus the GOP has made no effort to forge a bipartisan consensus on deficit reduction.

LITTLE IMPETUS. Democrats won't cut their favorite programs while seeing ever more tax cuts. Even GOP strategists concede that deficit reduction will go nowhere unless tax hikes are in the mix. Trying to eliminate deficits on the spending side alone is "completely insane," says Ron Haskins, a senior fellow at the Brookings Institution and former House GOP aide.

If the economy continues to grow, deficits may shrink from the $412 billion they hit in 2004. Bush will then trumpet progress toward his goal of cutting the deficit in half by the time he leaves office. But serious long-term deficit reduction is more dream than reality without real efforts to control entitlement spending and reverse some of Bush's tax cuts. Unfortunately, unless an economic crisis spurs lawmakers, there's no reason to believe serious deficit reduction will be on the table for the rest of the Bush Presidency. Gleckman is a senior correspondent for BusinessWeek in the Washington bureau