Fixation on Year 2002 Clouds Troubles Beyond

Never mind balancing the budget by fiscal year 2002, as President Clinton and top congressional leaders are promising. The real question is, what about 2003 and beyond? Will the new spending plan keep the budget balanced for any longer than a year?

That issue is troubling government and private budget analysts as political leaders from both parties rally around Clinton’s newfound willingness--and that of Republican congressional leaders--to eliminate the federal budget deficit five years from now.

While balancing the budget by 2002 will not be a cakewalk, it should not be that difficult either, most analysts said.

Revised estimates by the Congressional Budget Office show that lawmakers will have to cut only $154 billion more to erase the deficit that year--far less than the $285 billion forecast a year ago. Much of the $154-billion cut will come from lower interest rates.

The real problem will come after 2002--especially in 2008 and beyond, analysts said, when members of the baby-boom generation start to reach retirement age and the cost of Medicare, Medicaid and Social Security begins to explode.

Robert D. Reischauer, a Brookings Institution budget expert who headed the CBO from 1989 to 1995, warned that, unless lawmakers soon begin to make far more sweeping long-term changes than Clinton is asking, the deficit will come back quickly after 2002 and with a vengeance.

CBO figures show that, barring a major restructuring of Medicare, Medicaid and Social Security, the budget deficit could mushroom from zero in 2002 to 4.5% of the gross domestic product--the output of the U.S. economy--by 2010 and 9.5% by 2025. (It was 1.4% in fiscal 1996.)

To be sure, balancing the budget by 2002--or accruing a small surplus, as Clinton is proposing--would be a political plus for either party. Polls show that Americans rank budget-balancing high in what they consider important, though few believe it really will be done.

But fiscal experts worry that both sides will become so obsessed with meeting the 2002 deadline that they will pass up the opportunity to make the kinds of longer-term cuts needed to keep the budget in balance much beyond that.

Federal Reserve Chairman Alan Greenspan cautioned last month that, while eliminating the deficit by 2002 would be laudable, “it’s far more important” that the budget-balancing be achieved “in a manner which implies balance [in later years]” as well.

On the surface, prospects for reaching the 2002 deadline are good. Lawmakers already have passed two major money-saving measures--welfare reform and the phasing out of farm subsidies--the economy is growing strongly and the bulk of the baby boomers will remain taxpaying citizens.

“Everything is going for us,” asserted Rudolph G. Penner, former director of the White House Office of Management and Budget and now a fiscal advisor at the Barents Group KPMG, a consulting firm.

The Clinton administration conceded that the president’s budget plan will result in a new round of deficits after 2002, when the budget will be slightly in surplus, but insisted that the deficits will be no more than $2.5 billion or so each year--essentially in balance.

“The major point here is that we have time” to deal with the problem over several more years, Franklin D. Raines, new director of the OMB, told reporters Thursday. After 2020, he asserted, the budget will run a small surplus through 2050 and beyond.

But Carol Wait, director of the nonpartisan Committee for a Responsible Budget, warned that the president’s plan “does nothing to address the structural problems” in Medicare, Medicaid and Social Security posed by the retirement of the baby boomers late in the next decade.

Indeed, Wait accused the president of “backsliding” in his new budget by proposing costly new spending items and tax cuts. With those included, she pointed out, the deficit actually will go up before it goes down--and will not drop below last year’s level until fiscal 2000.

Wait and other budget experts said that the longer-term outlook also is threatened by the fact that both Clinton’s plan and Congress’ budget prescriptions contain bogus--or at least suspect--assumptions on how the government will get to a balanced budget by 2002.

Because White House and CBO budgets are calculated differently, Clinton will have to find another $63 billion in reductions that year to match the CBO estimates, which Congress uses. Unless he does, his proposed $17-billion surplus in 2002 will turn into a $46-billion deficit.

Many of the savings on which Clinton is counting for 2002 either are deliberately vague or are based on onetime bonanzas--such as profits from the sale of petroleum reserves--that cannot be repeated. And most of the real cutbacks are “backloaded”--postponed to 2001 or 2002.

Moreover, analysts said that Medicare, Medicaid and Social Security are not the only big federal spending programs Congress needs to tackle to put the nation’s fiscal house in order for the longer run. Another is defense, which many budget experts regard as a time bomb.

While Pentagon spending has come down by almost a third since the Cold War peak of the mid-1980s, the current defense plan calls for a force that many believe is too big for the nation’s future defense needs and too small to sustain the 1.46 million-strong military.

The administration has been trying to paper over the mismatch by deferring spending on military modernization and research and development, but the services are facing huge bills a few years from now for expensive new weapons--such as jet fighters--now on the drawing boards.

Finally, Brookings’ Reischauer warned that, without major changes in Medicare and Social Security, the cutbacks in the remainder of the domestic budget--from environmental spending to highway programs--will have to be so deep that it is simply unrealistic to count on them.

The caps on such programs--which Clinton is assuming will be maintained after 2002--already are so draconian that it is unlikely the lawmakers in office then will be able to stay within them, Reischauer said. He derisively branded them as “unfulfillable promises.”

Even more fundamental, for all the ballyhoo about balancing the budget by 2002, there is no consensus among the nation’s political leaders on how to make the kind of reforms needed to bring the budget into line over the longer run.

Indeed, budget experts said, there are relatively few choices: To avoid widening the deficit after 2002, Congress must either slash spending on Medicare, Medicaid and Social Security or raise taxes to a level that is likely to be politically unacceptable.

Among the possible solutions that would save the most money are converting Medicare to a subsidy that would finance basic private medical insurance policies for all Americans, extending the retirement age for Social Security or reducing benefits for spouses.

There also are competing demands: Republicans want to cut taxes, albeit by substantially different magnitudes. The two parties are not fully agreed on how to trim Medicare and Medicaid. And the economy could slip into a recession, bloating the deficit even further.

Still, Van Doorn Ooms, a former White House budget chief now with the nonpartisan Committee for Economic Development, believes that the political pressures will be strong enough that the White House and Congress will be forced to make some sort of deal.

“There’s a consciousness in the back of people’s minds that the demographic transition [stemming from the retirement of the baby boomers] is going to come,” Ooms said. “They may not tackle the long-term issue right now, but it’ll be impossible for them to put it away.”

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At a Glance

Highlights of President Clinton’s 1998-5 5-year plan:

Tax cuts

* $500 credit for children ($46.7 billion)

* $38.6 billion for $1,500 scholarships for the first two years of college

* $10,000 deductions for college expenses.

* Allows more penalty-free withdrawals from individual retirement accounts for education expenses, first-time home purchases and unemployment expenses ($5.5 billion)

* Reduces capital gains taxes by $1.5 billion by exempting sales of homes with profits less than $500,000

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Tax increases

* Raises taxes on businesses and airline travelers by $76 billion by closing various corporate loopholes and reimposing a 10% federal tax on airline tickets.

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Education

* Increases spending and tax breaks for education and job training by 20% in 1998 to $51 billion

* Increases the maximum Pell grant to $3,000, up from $2,700 currently

* Adds money for work-study community jobs

* Boosts spending for computers, Internet hookups and reading programs

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Medicare

* Culls $100 billion in savings over five years and $38 billion more in the sixth year. Most of it would come from hospitals, doctors and health maintenance organizations.

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The poor

* Restores about one-third of welfare cuts, mostly for legal immigrants’ lost benefits and food stamps but also for job training.

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Defense

* Decreases military budget to $265.0 billion