Analysts: Future Budget Outlook Gloomy

By Alan Fram, the Washington Post 
December 22, 2003

WASHINGTON - Keeping the federal budget at or near balance over the next 50 years could require painful tax increases, spending cuts or both, the Congressional Budget Office says.

In a look at the government's long-term budget outlook, Congress' nonpartisan fiscal analyst offered possible combinations of tax and spending changes, all of which would leave lawmakers choosing among politically unpalatable options.

Even so, some still would leave the government in fiscal peril. Yet, failing to act would drive the accumulated federal debt to unsustainable levels, said the study, released Friday.

"Taken to the extreme, such a path could result in an economic crisis," including the possibilities that foreign investors would pull out, the dollar's value plunge, interest rates and prices soar and stock markets collapse.

"The longer that lawmakers delay acting to counter an unsustainable budgetary situation, the larger the spending cuts or tax increases will eventually have to be," the 60-page study warned.

The big problem facing the government is the impending retirement of the baby boom generation, whose 76 million members will start later this decade relying on Social Security and Medicare and increase their use of Medicaid.

The budgets for those automatically paid benefits are also growing as medical costs continue to soar. The three programs provide pensions and medical insurance for the elderly, disabled and poor.

Social Security is so large, and Medicare and Medicaid are expanding so rapidly, that limiting the growth of defense, education and other spending that Congress controls would not be enough for sound budget policy, the report said.

"Substantial reductions in the projected growth of spending or a sizable increase in taxes as a share of the economy - or both - will probably be necessary to provide a significant likelihood of fiscal stability in the coming decades," the report said.

The study compared current and future spending and revenues to the size of the U.S. economy, now about $11 trillion. Economists consider the resulting percentage a useful way to measure the federal budget over time, because it illustrates how affordable particular programs or policies might be.

In the study, the budget office offered six hypothetical scenarios for restraining spending and raising taxes through 2050.

Highlighting how dire the long-range budget picture is, even the scenarios that let trillions of dollars in tax cuts enacted under President Bush expire, which would bring in piles of new revenue, would mean that "fiscal stability is not assured."

Of the six scenarios, three offered the chance of balanced budgets in 50 years.

But of the three, two used the politically unlikely assumption that the Bush tax reductions would expire. The third incorporated the improbable scenario that spending for Medicare and Medicaid would not keep pace with health-care costs, that spending for other benefits would shrink compared to the economy's size, and that other domestic programs would grow only with inflation.

In another scenario, revenues would rise from their current 16.2 percent of the economy to their historic 18.4 percent average, and spending for all programs but Social Security, Medicare and Medicaid would be less than half their current 9.6 percent of the economy. But "to prevent an indefinite spiraling of federal debt," spending on those three benefit programs would grow by no more than 0.5 percent annually over inflation, the report said.

The report's conclusions echoed numerous similar studies that have been done in recent years. But coming just as the calendar is to turn to a presidential and congressional election year, both parties tried using it to buttress their arguments for their favored budget policies.

"If spending is left unchecked, it could have a disastrous effect on the economy," said Rich Meade, Republican staff director of the House Budget Committee. "The bottom line is deficits do matter, and we need to address them."

Thomas Kahn, his Democratic counterpart, said, "The worst thing we could do is approve the Republican agenda, because its extra $1 trillion in new tax cuts would make the long-term budget problem even worse."