Deficit: Trillion-dollar shortfall looms, but what will the candidates do?

McClatchy NewspapersOctober 14, 2008 

WASHINGTON — The ambitious spending and tax cut plans that Barack Obama and John McCain are promising make no fiscal sense, experts say.

"Does either candidate have a realistic budget plan? Absolutely not," said Maya MacGuineas, president of the Committee for a Responsible Federal Budget, a nonpartisan research group.

The new president could face an annual deficit approaching a trillion dollars, warns David Walker, president of the Peterson Foundation, which tries to educate consumers about the nation's growing fiscal crisis.

High federal budget deficits can help spur the economy out of recession, and can have short-term benefits. But if they persist over time, their interest alone costs taxpayers hundreds of billions of dollars each year. They increase U.S. dependence upon loans from abroad, particularly from China. And they absorb limited capital that otherwise might finance more-productive investment that generates jobs and prosperity.

The deficit for fiscal 2008, which ended Sept. 30, was a record $455 billion, the White House announced Tuesday. The director of the nonpartisan Congressional Budget Office recently said the 2009 deficit could hit $750 billion, given the impact of the expected recession and financial market problems. Some private analysts put it at $1 trillion.

While Obama and McCain have suggested in general terms that they may have to adjust their spending and tax cut plans, they've offered few specifics. Instead, they continue to promote what they see as the most popular — and often costly — parts of their programs.

Obama, for instance, continues to run ads promoting his plan to cut taxes for 95 percent of America's wage earners. The Democratic nominee would raise income taxes for individuals earning more than $200,000 and families making more than $250,000.

He would also provide a "Making Work Pay" tax credit of $500 per person and $1,000 per working family. The price tag to the Treasury — according to the nonpartisan Tax Policy Center run by the Brookings Institution and the Urban Institute — could be $2.9 trillion over 10 years.

McCain would retain all of the tax cuts from the Bush era rather than let them expire in 2011, as they’re currently scheduled to do. That would cost the Treasury $4.2 trillion over 10 years, the Tax Policy Center said.

McCain maintains he can still balance the budget by 2013, and Obama vows he won’t increase the deficit. But it's impossible to find an independent analyst who shares their optimism.

"You can't say either candidate is coming up with a credible plan," MacGuineas said.

As a result, said Alice Rivlin, a Democrat and former Federal Reserve Board vice chairman: "We could in a worst case get to a trillion dollar deficit."

Both candidates promise to cut spending overall, while differing sharply on details, and to reduce the national debt, which hit $10 trillion recently. In the last year alone, the debt has been growing by an average of $3.15 billion per day, leaving each citizen with an average share of more than $33,000.

But neither candidate's plan is likely to significantly reduce the deficit, independent analysts said.

US Budget Watch, a nonprofit study group, found that in 2013, McCain's spending cuts would save $241 billion to $254 billion, hardly enough to offset his tax cuts and health care initiatives.

Obama's spending cuts would save $144 billion, Budget Watch said, far below what he would spend on his tax cuts and health-care programs.

"I don't think they're addressing the deficit in a serious way," said Robert Bixby, executive director of the Concord Coalition, a bipartisan research group dedicated to fiscal stability.

McCain likes to promote elimination of earmarks, or special projects inserted into spending bills by members of Congress to meet local needs, as an important way to achieve fiscal discipline. But earmarks cost only $18 billion last year — far less than 1 percent of the federal budget.

To cut spending, McCain has said, "we need to examine every agency of government." He wants to eliminate ethanol subsidies, for example. He proposes a one-year "spending pause" that would freeze all discretionary spending except for defense, veterans and a few other unspecified "vital" programs.

His program, he says, also would require bipartisan efforts to stop "the recent spending binge" and "successful reform" of large-scale programs such as Social Security, Medicare and Medicaid.

Obama promises to enforce pay-as-you-go budget rules that would require Congress to offset any new spending by increasing taxes or cutting other programs. And he wants to make sure that all federal contracts over $25,000 are subject to competitive bids.

Still, Obama proposes extensive new spending on health care, energy development, infrastructure repair and more, and he's made clear that those costly projects are higher priorities for him than reducing federal deficits.

Obama has said there are "a range of things that are probably going to be delayed" because of the impact of the financial crisis, but that he won't get specific until he sees how much tax revenues decline as a result of the slowing economy.

Some analysts say the new president will be forced to take bolder steps. One motivator could be the staggering size of future deficits, particularly as Social Security payments begin to exceed revenues in 2017 and as Medicare becomes insolvent in 2019.

"The long-term deficit problem is becoming a short-run budget problem very rapidly," said Rudolph Penner, senior fellow at the Urban Institute and a former CBO director.

The new president could also be prodded by the growing deficit threat's similarity to the financial industry's meltdown. Like the financial industry, said Walker, the government is involved in "too much leveraging, not enough focus on cash flow," and a watchdog system, in this case Congress, that's been woefully inadequate.

"If there is a silver lining to the Wall Street meltdown, it's that it could provide an object lesson in what should not happen," said Bixby of the Concord Coalition.

As a result, Leon Panetta, former budget director and chief of staff in the Clinton White House, recommended delaying or abandoning a lot of campaign promises.

"The American people are not stupid," he said. "The real question is whether the leadership of this country will have the honesty to tell people what the real situation is."

MacGuineas saw some hope. "A lot of members of Congress are ready to work together," she said. "They're tired of not being able to do the job."

However, that's no certainty.

Should the economy continue to stagger, there will be enormous pressure to give it a quick jolt.

Rivlin, the former Federal vice chairman, thought what's needed quickly is an economic-stimulus plan. Obama has made a $175 billion two-year plan a centerpiece of his campaign. He would use the money to help create infrastructure jobs, extend unemployment benefits and help households with their winter heating bills.

But handing out another stimulus could stifle efforts to make the harder choices that skeptics think are needed.

"It satisfies political needs rather than economic needs," said Panetta, now a professor of politics at Santa Clara University. "And there's always this need to look like you're doing something."

"Deficit reduction is about pain," said Brian Riedl, senior policy analyst at the Heritage Foundation, a conservative research group in Washington. "Those running for office really don't want to discuss those things."

MORE FROM MCCLATCHY

To ask a question about this story or any economic question, go to McClatchy's economy Q&A

Economy in turmoil

Many doubt that McCain's health plan would help uninsured

Complete McClatchy election coverage

McClatchy Newspapers 2008

McClatchy Washington Bureau is pleased to provide this opportunity to share information, experiences and observations about what's in the news. Some of the comments may be reprinted elsewhere in the site or in the newspaper. We encourage lively, open debate on the issues of the day, and ask that you refrain from profanity, hate speech, personal comments and remarks that are off point. Thank you for taking the time to offer your thoughts.

Commenting FAQs | Terms of Service