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How much more deficit reduction does the U.S. need?

January 11, 2013|By David Lauter
  • Office of Management and Budget Director Jacob Lew, White House Press Secretary Jay Carney and Treasury Secretary Timothy Geithner answer reporters' questions in September about President Barack Obama's deficit reduction plan.
Office of Management and Budget Director Jacob Lew, White House Press Secretary… (Chip Somodevilla / Getty…)

WASHINGTON – The divisive negotiations over the federal budget have highlighted Washington’s partisan divisions and deepened public mistrust of Congress, but despite the histrionics, President Obama and congressional Republicans have made significant progress over the last 18 months toward stabilizing the government’s finances.

Taken together, the budget agreement reached in the summer of 2011 and the tax compromise approved on New Year’s Day will reduce the deficit over the next 10 years by about $2.3 trillion, according to groups that monitor federal spending.

So how much more remains to be done?

The Center on Budget and Policy Priorities, in a new analysis, suggests a goal of $1.2 trillion over the next 10 years in additional spending cuts and tax increases. That would freeze the level of the federal debt and give policymakers time to figure out the government’s longer-term budget problems, the group said.

The center is a liberal-oriented policy group in Washington, but its view is at least partially shared by more conservative organizations. The business-oriented Committee for a Responsible Federal Budget, for example, recently issued an analysis that largely agrees with the center’s math, if not its policy recommendations. The committee calls the goal of freezing the debt at the current level the “bare minimum for achieving fiscal sustainability.”

Currently, federal debt equals about 73% of the size of the economy, the gross domestic product. That’s relatively high by the standards of recent decades, although the level of debt peaked at well over 100% of the GDP during the World War II era.

Economists agree that a debt level that’s too high can severely damage a country’s economy but disagree about what “too high” means. Conservatives tend to argue that the current level is already too high. In practice, however, elected officials in both parties have opposed measures that would push the debt below the current level over the next decade. They fear that a decrease in federal deficits that’s too rapid would throw the economy back into recession. The “fiscal cliff,” for example, would have reduced the debt to less than 60% of the GDP over 10 years, but both Republicans and Democrats rejected that as too drastic.

Over the longer term, the government has a bigger financial problem – the cost of retirement benefits, mostly healthcare, for the huge baby boom generation. Those costs are expected to send government spending up sharply and will begin ballooning the debt early in the next decade.

Some budget analysts, particularly conservatives, argue that Congress needs to act now to reduce the cost of Medicare and Social Security to head off that longer-term problem. More liberal analysts argue that Congress should go slow.  Much of the problem depends on how quickly healthcare costs rise, and much of that rise remains uncertain, they note. Inflation in healthcare has slowed significantly in the last few years. If that trend continues, the long-range budget problem will shrink. That prospect justifies a go-slow approach, liberal budget analysts argue.

The deficit reduction so far includes about $1.5 trillion in spending restraint agreed upon in the August 2011 budget deal and about $560 billion in net new tax revenue from this month’s compromise. By making deficits smaller than they otherwise would be, those two deals will reduce the government’s interest payments by about $300 billion over the decade.

If Congress does nothing more, the automatic across-the-board budget cuts that were postponed in this month’s deal would produce another $1.2 trillion in deficit reduction over a decade, matching the level that the Center on Budget and Policy Priorities projects will be needed to stabilize the debt. But neither side likes the automatic cuts. The Obama administration and congressional Republicans both say they slice too deeply into Pentagon spending. The administration and congressional Democrats dislike the way the spending cuts would hurt domestic programs.

Negotiators have until around the beginning of March to come up with a better solution, although Congress could give itself more time by postponing the automatic cuts once again. Obama has insisted that any long-term solution be balanced between additional spending cuts and new taxes. Republican leaders say they will not accept any new taxes.

david.lauter@latimes.com

Twitter: @DavidLauter

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