Deficit Seen as Threat to U.S. Standard of Living : Economy: Past and present heads of Congressional Budget Office present a grim growth forecast.

The nation’s chronic, growing budget deficit threatens to lower American living standards in the next decade and “there is no relief in sight,” the director of the Congressional Budget Office warned Tuesday.

Robert D. Reischauer, the CBO chief, and two of his predecessors painted a grim picture of the prospects for U.S. economic growth at the start of the new century during testimony before the House Banking, Finance and Urban Affairs subcommittee on economic stabilization.

While recovery from recession will help to lower red-ink spending temporarily, the underlying deficit will start climbing again to $423 billion and public debt will double to $6 trillion by the year 2002, Reischauer predicted.

Rudolph G. Penner, former head of the CBO and now director of economic studies for the Peat Marwick accounting firm, said the “exploding cost of health care” would drive up federal budget deficits after the middle of this decade, despite an economic rebound.

“If the deficit outlook is worsening during the best of times, . . . one must worry a great deal about what happens when the demographic situation begins to worsen rapidly with the retirement of the baby boom generation after 2010,” Penner said.

“Ultimately, significant cuts in (federal) program spending and increases in tax revenues will be required, . . . but the political barriers to their adoption have been largely insurmountable,” Penner said. “I think that we have to give our leaders more power to impose painful solutions on their followers.”

Alice M. Rivlin, the first CBO director and now a visiting professor of economics at George Mason University, gave a similar analysis of “triple-digit deficits.”

“The real problem is that such deficits gnaw at the standard of living and slowly reduce its growth,” she said. “If Americans are to live better in the future, they need to save more and channel those savings into productivity-enhancing investment.

“If, instead, they continue to use their relatively low private savings to finance ongoing expenses of government, they are likely to get low investment, stagnant productivity growth, continued trade deficits and growing obligations to send interest, dividends and profits overseas,” Rivlin said.

At the moment, she added, it would be a mistake for Congress to risk delaying the recovery by trying to cut the deficit beyond enforcing the 1990 budget agreement.

“Congress will not get any public recognition for holding to the spending caps and pay-as-you-go rules as long as the actual deficit remains so high, or perhaps even when it falls,” Rivlin said. “Public understanding of the issue is low, and suspicion of Congress is high. I can only urge you to hang in there--because it is right.”

In his analysis, Reischauer said an upturn in the economy and income from selling assets of failed savings and loans would diminish the deficit in the next several years but that an underlying mismatch between revenues and spending would hobble economic growth afterward.

“Ultimately, the large deficits keep living standards from attaining the level they could reach if the deficits were smaller,” he said. “The problem is all the more pressing because the deficits are occurring when other factors--low private savings rates, the slow growth in productivity and demographic trends--also will tend to restrain the improvement of living standards.”

Reischauer said government policies designed to spur savings and investment--both through a reduction in federal borrowing and revised spending and taxation measures--”could provide an important boost to long-term growth.”

He listed deficit reduction, education below college level and job training for adults as three programs that would contribute to higher living standards in the next decade.

“The budget outlook is grim,” he said. “Investment, growth in labor productivity and overall economic growth have been adversely affected (by the persistent large deficits of the 1980s), and there is no relief in sight.”