Deficit may lead to fiscal crisis

By DEREK O. SANDS, UPI Correspondent  |  May 19, 2004 at 6:09 PM
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WASHINGTON, May 19 (UPI) -- An unprecedented rise in the deficit and the impending pressure of a retiring baby-boom generation on Social Security and Medicare are leading the United States toward fiscal crisis, according to a bipartisan forum who met in Washington this week.

"The perfect economic storm is taking shape and will soon make landfall in America, unless we do something about it," Sen. Joe Lieberman, D-Conn., said Monday at the forum, held at The New America Foundation, a non-partisan, Washington-based think tank.

In the wake of last week's request by the Dept. of Defense for $25 billion to continue operations in Iraq and Afghanistan, and record budget deficits projected to be half a trillion dollars this year, Lieberman and Sen. John McCain, R-Ariz., joined think tank experts from across the political spectrum at the forum, "Restoring Fiscal Sanity -- While We Still Can."

Bipartisanship was the word of the day, whether in criticism or cooperation. McCain said the responsibility for deficits lies with both parties.

"Fiscal irresponsibility has become a great unifier" for Democrats and Republicans, McCain said.

McCain criticized Democrats for pork-barrel spending and Republicans for tax cuts to the wealthy during wartime. The Dept. of Defense asked for $25 billion last week, he said, while at the same time Congress gave a $180 billion tax cut to big business, which included $18 billion for oil and gas companies.

Lieberman's criticisms focused on the lack of forethought during the budgetary process. He warned that, according to an audit by the Medicare trustees, the U.S. government faces $72 trillion in unfunded liabilities. Unfunded liabilities include what must be set aside now to fund the future of Social Security and Medicare, based on current taxing and spending policies. That is almost twice the net worth of the entire United States, he said, and seven times the current gross domestic product.

Charlie Kolb, president of the Committee for Economic Development, reiterated that warning. If fiscal policy doesn't change, he said, Medicare and Social Security spending would rise unsustainably, from eight percent to 17.5 percent of GDP. He also said that the best way to discipline spending is to reintroduce the pay-as-you-go requirements into the budget process.

Pay-as-you-go, often referred to as PAYGO, stipulated that any lowering of taxes or increases in spending had to be offset with a lowering of spending or an increase in taxes, so the budget would balance. The federal budget followed PAYGO rules from 1990 until they expired in 2002.

The way that discretionary spending is settled on was also the target of attack at the forum. McCain partially blamed the deficit on the discretionary budget process, in which Senators have insufficient time to review the omnibus appropriations bill, and are unable to limit unjustified spending.

Lieberman also found fault with the current appropriations process. "Our budget process in broken," he said, it is no longer possible to control the budget because of last minute appropriations methods.

Discretionary spending refers to all spending aside from Medicare, Medicaid, Social Security and a few other entitlement programs. It also includes defense spending.

Economists agree that the need for a government to run short-term deficits is justified, according Bob Bixby, executive director of the Concord Coalition, a non-partisan group that advocates fiscal responsibility and the protection of Social Security, Medicare and Medicaid. But that justification is based on the need to support a weak economy through increased spending, or sudden emergency expenditures.

With a predictably-increasing defense budget and a strengthening economy, there is no need to maintain deficit spending, he said.

While all agreed that increasing deficits and the demands of retiring baby boomers are on a collision course, not everyone agreed on how to fix it.

Maya MacGuineas, of the New America Foundation, suggested a progressive consumption tax. The tax would subtract savings from income and base the tax amount on how much a person spent. Those that saved more would pay less, encouraging savings and reducing stress on federal retirement funds.

Stuart Butler, of the Heritage Foundation, said that tougher budget rules were needed to reduce spending, and William Nisken, of the Cato Institute, agreed.

The solution to the impending budget crisis "should focus primarily, or exclusively, on spending cuts," Nisken said. "$100 billion in defense cuts in weapons that have nothing to do with the war on terror," he said.

Alice Rivlin, senior fellow and director of the Greater Washington Research Program at the Brookings Institution, suggested a more balanced approach. Action is required on both the revenue and spending side, she said. Working toward a bipartisan consensus and restoring PAYGO requirements on tax cuts and entitlements would also help, she said.

Bob Greenstein, of the Center on Budget and Policy Priorities, said that the primary problem facing long-term deficit reduction is the double-digit growth of health care costs.

Paul Weinstein, of the Progressive Policy Institute, said the way to fiscal discipline is by rolling back corporate welfare and tax breaks for the wealthy, and by cutting older, obsolete federal programs.

Opinions about cutting the defense budget varied as well. While Rivlin said there was room in the defense budget for cuts, Greenstein said that since the war on terror began, other areas of the defense budget have become opaque to scrutiny. And MacGuineas said there is no excuse not to plan for future increases in defense spending, because we know spending will go up.

Lieberman also took the opportunity to tout his Honest Government Accounting Act (S. 1915), which would force the president and Congress to consider the long-term implications of budget decisions. Introduced into the Senate at the end of 2003, the act would mandate the use of present value analysis to forecast future funding and expenditures. These forecasts would be published, and Congress and the president would be required to submit plans to deal with any long-term shortfalls.

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