"

Big Budget Deficits Demand Number Crunching, and More

• DECEMBER 30, 2009

By JOHN D. MCKINNON

Think your job is tough? Consider the task facing Peter Orszag, the White House budget director.

Mr. Orszag is good with numbers -- he is a London School of Economics-trained economist and the son of a Yale math professor. But even Mr. Orszag is going to have trouble solving this puzzle: how to bring long-term annual federal deficits down from their highest sustained levels since the early 1990s.

Mr. Orszag is aiming to lower the deficit to 3% of gross domestic product within five years, down from an average of 5% that is projected for the decade beginning in 2010. In fiscal 2015, for example, it would require eliminating $180 billion from the $739 billion deficit that President Barack Obama's administration projects will occur under current budget plans.

To get a sense of how much money $180 billion is, consider that it is roughly the combined current annual spending of the departments of Commerce ($15.8 billion), Energy ($46.3 billion), Interior ($13 billion) and Transportation ($90.5 billion) departments.

The impetus to act is growing. Foreign investors such as the Chinese government, the U.S.'s largest creditor, are showing impatience with Washington's spending. With an eye to the 2010 elections, independent voters are worrying about the deficit.

Complicating matters, the Obama administration must time its budget surgery perfectly. Cut the deficit too fast, and it could depress demand and stifle the recovery. Cut too slowly, and it could force up interest rates and stifle the recovery.

The timing issue appears to worry Mr. Orszag as much as anything as he prepares next year's budget, which will be released in February. That document "will reflect our best judgment about how to walk that line," he said in a written response to a request for comment.

The administration also might propose setting up a commission and requiring Congress to act on its recommendations. Sen. Kent Conrad (D., N.D.), who is proposing a deficit-reduction commission of his own, says he believes momentum is building for the idea.

But the administration could propose a commission that doesn't have much influence. And Congress could change the rules about the commission's authority later if it wanted to avoid difficult choices. For example, the Medicare prescription-drug bill of 2003 established a trigger mechanism to force Congress to consider deficit-reduction measures when Medicare's financial situation deteriorated. But since then, Congress has simply switched off the trigger each time it was set to force action.

"Too often, commissions are a way to pretend you are doing something or create the appearance of something being done when in fact it isn't," said Robert Reischauer, president of the nonpartisan Urban Institute and a former director of the Congressional Budget Office. "The process can't force the Congress to do that which it doesn't want to do or regards as political suicide."

And many Republican leaders say they doubt the Obama administration's commitment to deficit reduction, especially while the White House is promoting a planned expansion of the government's role in health care.

Sen. Judd Gregg of New Hampshire, the Senate Budget Committee's top Republican, says he doubts the White House will propose any meaningful action on deficit reduction. "It's so disingenuous it's almost laughable," he says of the administration's -- and Mr. Orszag's -- promises to address the deficit problem. "I don't think there is any seriousness to it at all."

Each method of cutting the deficit has its own particular drawback. Here is a look at some of the possibilities:

1. Do nothing

Strange as it seems, the easiest way to get the deficit under control is to do nothing.

Some of the biggest drivers of long-term deficits are an array of middle-class tax breaks set to expire at the end of 2010. They include rate cuts made during the administration of President George W. Bush, child credits and the annual relief that Congress regularly passes to shield middle-income earners from the Alternative Minimum Tax. (The AMT, a 1960s-era provision aimed at high-income Americans, is hitting more people because it was never indexed for inflation.)

If Congress and the White House let those breaks die next year, the deficit problem would be solved overnight.

That isn't going to happen. Such a move would violate Mr. Obama's pledge not to raise taxes on families making less than $250,000. Congressional Democrats also are wary of allowing the Bush-era tax breaks to expire now that they are in charge. Instead, they likely will allow only those for the well-to-do to disappear, raising taxes for families with incomes around $250,000 and up.

2. New taxes

One idea that has garnered attention is a value-added tax, essentially a tax on businesses' sales of goods and services, which is widely used in Western Europe. It would stir fierce opposition among companies at a time when the administration is trying to reassure business that it is safe to start adding jobs again.

Because a VAT is a tax on consumption, it would tend to fall disproportionately on lower-income earners. There are ways to cushion that impact. But administration officials haven't shown much enthusiasm for a VAT.

Another possibility is a tax on Wall Street trading. That could raise huge sums, as much as $150 billion a year. Some in the administration, including Treasury Secretary Timothy Geithner, worry it could drive trading offshore unless it is coordinated with other countries, a process that could take years.

3. Fundamental changes

Changes to entitlement spending and income taxes could be on the table. Among the possibilities are raising Social Security taxes for higher earners; limiting the rate of entitlement benefit increases; and further tightening health-care spending rules that Congress has spent much of this year crafting. For corporations, one idea would be to put an expiration date on business tax breaks so that they would die unless Congress voted to extend them.

Since these changes would face tough opposition, the administration might prefer to build consensus for some of them through a special commission. Congress has created special deficit-reduction mechanisms in the past, but those measures have met with only mixed success.

The Gramm-Rudman-Hollings act of 1985, for example, called for automatic spending reductions if budget targets weren't met. But Congress often found ways around it. Budget deals of the 1990s relied on spending caps and pay-as-you-go rules to bar legislation that added to the deficit, but those rules proved porous, too.

On the other hand, a special commission led by Alan Greenspan in the early 1980s to fix a looming shortfall in Social Security worked effectively, even though its fix involved both raising taxes and increasing the retirement age.

4. Magic asterisks and rosy scenarios

More . . .

=============================

CBO is one office I feel reasonably good about. They are ruthless non-partisan truth tellers and take extreme pride in serving it up just like it is.