In The Red
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MARGARET WARNER: Today’s report by the Congressional Budget Office, projecting much higher deficits than were expected just a few months ago, immediately provoked controversy. The ranking Democrat on the Senate Budget Committee accused the president of taking the country down the “dangerous path of fiscal irresponsibility.” Treasury Secretary John Snow in London repeated the president’s pledge to cut the deficit in half in the next five years.
Here, again, are the numbers. The current fiscal year’s deficit will be $477 billion, a record. The ten-year deficit, through 2013, will total $2.4 trillion, $1 trillion more than the $1.4 trillion projected last august. And by 2013, the national debt will rise sharply, from $3.9 trillion last year to $6.4 trillion then.
MARGARET WARNER: For a closer look at these new projections and the factors underlying them, I’m joined by the director of the CBO, Douglas Holtz-Eakin. Welcome Mr. Holtz-Eakin. Let’s take first of all a look at the numbers a little bit. This year’s deficit, $477 billion, a record. Put that in some context for us. How does it compare historically to other times, say when we were coming out of an economic either recession or slowdown.
DOUGLAS HOLTZ-EAKIN: This is the largest dollar deficit that the federal government has ever run. But just as when you go to get a car loan, the first thing they ask you us how much you make, what’s your salary, it appropriate when we borrow money as a federal government to ask what’s behind that borrowing and the answer to that is our economy.
This is an economy with $11 trillion of income and if you look at this deficit compared to the economy it’s about 4.2. That’s not nearly as large as the 6 percent deficit, for example, that we ran in the early 1980s, so it’s large, it’s large in dollar amounts, but it’s not large relative to our economy.
MARGARET WARNER: Then let me also ask you about the trend, just what’s happened in the last year. Just a year ago when your office gave the same report a year ago you were actually projecting that after ten years we’d be in a surplus of around a trillion. Then by August you were saying well it will be a deficit but it will be 1.4. Now five months later it’s 2.4. What happened just in that year?
DOUGLAS HOLTZ-EAKIN: Well, if you look at what happened this the last year there’s really been two big developments, one is the economy. Last January we expected the economy to recover relatively quickly. As it turns out the recovery was slower to come around than we had thought. Since August we’ve seen the economy grow quite rapidly, and then that’s affected our projections on balance to be better in the near term, and over the long term not a big impact.
The second thing that’s happened is a lot of legislation. In the spring it was tax cuts, big impact on the budge outlook and since August there’s been about a trillion dollar swing, $700 billion of that is new legislation, about 60 percent has been Medicare prescription drug bill and the rest is appropriations and other things that Congress passed and the president signed.
MARGARET WARNER: Including for just the reconstruction of Iraq?
DOUGLAS HOLTZ-EAKIN: There was a supplemental appropriation for $87 billion, 18 of that was the reconstruction of Iraq.
MARGARET WARNER: Is it possible to say if you’re looking at the increases, the increases that seem to be much faster than the rate of inflation, to say what is driving it more, tax cuts that is, you know, fewer revenues, or spending increases?
DOUGLAS HOLTZ-EAKIN: Well, if you look back, and ask what’s happened to the fiscal outlook for say fiscal year 2004, go back to 2001 we expected a much better fiscal outlook, since then about 40 percent of the move towards this deficit has come from the economy, and about 60 –
MARGARET WARNER: Meaning the economic growth not being as robust as you would hope.
DOUGLAS HOLTZ-EAKIN: Yeah, we’ve had a recession. Absolutely, we’ve had a recession and we’ve seen on top of the recession a decline in tax receipts above and beyond that, with the decline in the stock market, for example, and things related to the stock market. So we’ve seen a big decline. The remainder, 30 percent has been tax cuts, 30 percent has been spending increases, so it’s equally divided.
MARGARET WARNER: All right. Let’s look at the spending side. The Democrats had press conferences today and they said really the big increases in spending or only in three areas, defense, homeland security and foreign assistance, is that right?
DOUGLAS HOLTZ-EAKIN: Well, I think that if you look at the past five years, and you look at the discretionary spending those things that Congress votes on each year, we’ve seen a growth rate of about 6.9 percent per year, and that growth has been on both sides, defense and non-defense alike.
So we’ve seen a pattern of spending increases over the past five years. Going forward, the key questions will be how much new authority is awarded to agencies for spending, and in the last year 2003 and 2004, we saw that new budget authority, the new ability to spend money grow at only about 3 percent per year. So looking back we’ve seen fast growth. If that pattern is created in the future, growth will start to come down.
MARGARET WARNER: And then, as we know the president said recently and John Snow reiterated today he thinks he can cut this deficit in half just by holding the, I hate using these words, discretionary spending, but that’s non-Social Security, non-Medicare so things that Congress has control over, if he can hold that to one percent he can cut the deficit in half in five years. Is that doable, just looking at the numbers?
DOUGLAS HOLTZ-EAKIN: Budget numbers are real simple — our projections assuming that kind of spending grows at 2-and-a-half percent a year, just inflation. 2009 is a little under 2 GNP. So it’s cut in half.
MARGARET WARNER: Now your numbers as I looked at them, or your ten-year out projections did assume that these tax cuts that were passed — say the 2001 — would sunset, would end, expire, ten years down the pike. The president has called on Congress not to let that happen. What if the tax cuts are continued. Then how much more potentially in the deficit hole would we be?
DOUGLAS HOLTZ-EAKIN: Our projections assume everything is — all the programs stay unchanged and we let spending grow two and a half percent so, we can change any one of those pieces. Letting the tax cut be made permanent would cost about 1.5 trillion, total ten-year budget numbers and it would change a budget that was balanced at the end of the budget window to something that’s in deficit by about $380 billion. That’s about 2 percent of GDP.
MARGARET WARNER: So they would be a lot worse?
DOUGLAS HOLTZ-EAKIN: It would be a substantial reduction in receipts to the federal government.
MARGARET WARNER: Is there a way without getting into a lot of numbers here, is there a way to grow our way out of this deficit hole? That is would you raising tax rates, could economic growth be such that it would just generate greater revenues from both individuals and corporations, or are the rates so low now that that really isn’t feasible?
DOUGLAS HOLTZ-EAKIN: There are two kinds of growth, one kind of growth is the one that just gets the economy out of a recession, gets things back to normal. That kind of growth is not going to change the long term outlook, it will just change this year and next year.
MARGARET WARNER: Is that sort of what’s been going on now?
DOUGLAS HOLTZ-EAKIN: We’ve got that. We’ve built that into our forecast, we’re expecting it, it’s part of the projections you saw of longer term growth is very important, but it doesn’t look to be in the cards that would count on the productivity increase that makes this problem go away.
So the deficit really comes down to policy choices. What kinds of choices will Congress and the president make about spending, that will be the focus for the next five years. Taxes, that will be the focus for the second five years as the sunsets come up and then longer material what will Social Security, Medicare and Medicaid look like. It really plays out that way.
MARGARET WARNER: Because, all your projections you really haven’t taken into account the big new costs when the baby boomers retire and Medicare and Social Security?
DOUGLAS HOLTZ-EAKIN: We extrapolate for ten years, that begins to say the edge of the baby boom, with that retirement the combination of Social Security, Medicare and Medicaid plus an aging population, we’ll see those programs grow much larger as the years pass. And we’ll have to come to terms with that as a fiscal matter.
MARGARET WARNER: So are you basically saying that the current rate of spending and the current rate of taxes, without making some change, are unsustainable?
DOUGLAS HOLTZ-EAKIN: I think that fiscal autopilot is not an option. Certainly we know that over the next ten years there will be a vigorous day about tax cuts, there will be a vigorous debate about spending and what we do with homeland security and defense. But once we pass those ten years, those programs, Social Security and Medicare are going to force us to make some fiscal decisions. How large will the government be and how will we finance it.
MARGARET WARNER: Thank you very much.
DOUGLAS HOLTZ-EAKIN: Thank you.