Deficit reduction target reached, but no one’s happy
WASHINGTON — For the last two years, official Washington has pursued a clearly defined budget goal — reduce projected deficits for the next decade by $4 trillion.
Mission accomplished. Why so many long faces?
President Obama and congressional Republicans went through their first round of cutting in 2011, shaving about $1.5 trillion from federal spending. The “fiscal cliff” deal in January brought another $720 billion, mostly in higher taxes on the wealthy.
Now the automatic spending reduction package known as the sequester is projected to cut spending by about another $1 trillion over the decade, with some $85 billion coming this year. Those changes in spending and taxes will save the government an additional $700 billion in interest over the decade by reducing the need to borrow money, bringing the overall total to more than $3.9 trillion.
Earlier cuts have already had an effect. Although polls show that most Americans think the federal deficit is still growing — almost 2 in 3 people said so in a recent Bloomberg poll — the opposite is true: The deficit hit its peak in 2008 and has begun to shrink rapidly.
Red ink totaled $1.2 trillion last year, will fall to about $900 billion this year and will drop to about $476 billion by the end of Obama’s second term, according to the Congressional Budget Office. Though still a large number, that’s less than 3% of the huge U.S. economy, a share below the level most economists consider threatening.
No one expected that achieving a deficit reduction target would prompt a parade. As politicians know, the public disdains deficits in theory, but in practice has a greater dislike for both spending cuts and tax increases. Still, as the sequester put the final piece of the $4-trillion deficit reduction into place, the reaction among both Republicans and Democrats was notable for its bitterness.
Three reasons underlie the negativity. They involve process, timing and the ultimate goal each side seeks to reach. Those disagreements seem likely to shape continued squabbles over federal spending and taxes for at least the next two years and possibly throughout Obama’s second term, starting with a deadline at the end of this month that could lead to a partial government shutdown. (Both sides seem to want to avoid that.)
The process some on both sides had envisioned was the much-discussed “grand bargain” in which Democrats would agree to cut Medicare and, perhaps, Social Security in exchange for Republican agreement on a tax increase.
In August 2011, Obama and House Speaker John A. Boehner (R-Ohio) failed to reach such a deal. Instead, both sides agreed to the sequester as a backup, gambling that they wouldn’t need it. Republicans bet they would win the 2012 presidential election and be able to enact their own budget solutions. Obama believed that if he won reelection, the Republican “fever” to oppose tax increases would abate.
Both lost their bets. Republican opposition to taxes has only hardened as the party has found itself divided and besieged on other issues after Obama’s reelection. The president forced Republicans to accept the tax increase contained in January’s fiscal cliff deal because he gave them no choice — not acting meant an even bigger tax hike. Since then, Obama has offered up cuts in Medicare and Social Security cost-of-living adjustments that Republicans had sought, but Republican leaders have repeatedly said they would not agree to more tax revenue.
Now, Obama has largely given up on reaching a large-scale deal with Republicans, according to former White House officials and others close to him. Where he once talked about the fever breaking, he now tells people that he thinks GOP legislators are unwilling to stand up to their most conservative voters and cannot reach a compromise.
The desire to step away from negotiations is not limited to his side of the aisle. Many Republican policy experts have similarly retreated, advising GOP lawmakers that until they recapture the White House, they can block Obama’s budget priorities but can’t expect to enact their own.
With both sides interested in moving on to other issues, the sequester seems likely to stay in place for the rest of the budget year, which ends Sept. 30, even though it embodies policies that both sides see as their second choice at best.
Both sides also dislike the cuts for a significant timing problem: They begin hitting now, when the economy remains weak, and will probably slow the recovery. At the same time, the cuts do very little to help with the bigger budget challenge down the road.
Sometime in the next president’s tenure, deficits probably will start worsening again. About 40 million more Americans are expected to become eligible for Medicare and Social Security by the end of the decade as baby boomers retire, and as they move onto the rolls, costs will rise fast.
But the political system deals poorly with issues that will come to a head in some future president’s term. Moreover, the size of the problem remains uncertain, dependent on how fast the economy grows and how much healthcare costs rise. Recent data have shown healthcare inflation slowing substantially, causing the budget office to reduce cost estimates by about 15%, or some $200 billion.
No one knows whether that good news on healthcare is permanent, but already it has made liberal Democrats less willing to consider big changes in Medicare right away.
The mistrust each side feels for the other makes a big deal even less likely.
Many Democrats fear Republicans would simply dismantle Medicare if given an opportunity. Republicans feel Democrats lack a sense of responsibility about the government’s long-range financial situation and will spend the government into crisis. And each is unwilling to give up its ideological goals — for Republicans, a smaller government; for Democrats, a more protective one.
All that helps account for Washington’s budget gloom.
As Federal Reserve Chairman Ben S. Bernanke told Congress last week, “Significant progress has been made recently toward reducing the federal budget deficit over the next few years.” By contrast, “the difficult process of addressing longer-term fiscal imbalances has only begun.”
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