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February 15, 2004 |
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By
BRIAN LAWSON |
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It would be a lot easier to make the numbers
work in a household budget if, say, the mortgage and car payments were not
included in the calculations.
Of course, that approach could cause problems with creditors down the line.
Critics say the Bush administration's budget for fiscal 2005 and its future
projections take a similar tact.
Groups ranging from the liberal-leaning Center for Budget and Policy Priorities
to the tax-wary Concord Coalition to investment banker Goldman
Sachs have argued during the past few months that the Bush budget proposal, over
five years, ignores an estimated $160 billion in costs in 2009. Those estimates
generate an overall budget deficit projection of more than $5 trillion by 2014.
Along with concerns that the $2.4 trillion budget fails to include significant
cost increases and revenue reductions expected in coming years,
economists have trotted out the now-familiar argument that huge deficits and
foreign debt required to finance the deficits could weaken the dollar and
generate inflation, raise oil prices and drive up borrowing costs.
In fact, the president's own budget analysis, issued with his fiscal 2005
budget, includes the comment, "Long-run budget projections show clearly that the
budget is on an unsustainable path."
But as the Bush administration has pointed out, long-term projections are
generally inaccurate. For instance, in 1991, the notion of federal budget
surplus less than 10 years later was hard to imagine, but it happened. More
recently, the budget surpluses were viewed as a bit of a problem, with
government holding more of the people's money than it should.
Then the stock market tanked, terrorists struck, the economy didn't bounce back
as quickly as expected, and now surpluses are just a memory.
Dr. Niles Schoening, professor of economics at the University of Alabama in
Huntsville, said last week the debt is also being financed, in the largest
proportion ever, by foreign governments, mostly central banks. He said that
creates a potential for instability for the dollar.
Foreign countries "hold 40 percent of our national debt," Schoening
said. "The economy is likely to continue to improve, but the long-term problem
remains, and it's a political one.
"This is destabilizing and a problem for other countries. The money is not there
for them if the wealthiest country in the world is the largest
borrower. This debt has to be financed, and that puts lots of stress and
pressure on the international financial system."
Schoening said the weaker dollar has been good for U.S. exporters, because it
means their products are cheaper to make and they sell for more to other
countries. But, he said, oil-producing nations that sell their chief asset in
dollars are likely to keep prices high, rather than see prices shrink along with
the dollar's value.
Higher oil prices ripple through the economy, driving up costs, he said.
The International Monetary Fund and former Treasury Secretary Robert Rubin both
issued research papers in January arguing that the prolonged deficits likely
will drive up interest rates and crowd out private borrowers, since the
government will be first in line to borrow more money to cover the debt.
Rubin, who served under President Clinton, said the financial markets regard the
high deficits as a lack of fiscal discipline. In a paper presented to the
American Economic Association in January and in remarks outlining the paper,
Rubin said the expectation in financial markets is that eventually the Federal
Reserve will begin printing more money, allowing inflation to creep up to absorb
some of the debt.
If that occurs, Rubin said the financial markets likely will demand higher
interest rates to offset the inflation, making it more expensive to borrow
and leaving even less money for the government to do its business.
Supporters of the president's approach contend that reduced spending and
improved growth will help ease the budget woes, but revenue collection may be a
problem.
The Congressional Budget Office reports the U.S. Treasury will collect less
revenue in 2004, as a percentage of gross domestic product, than at any time
since 1950. The collected revenue is about 15.8 percent of GDP according to the
CBO.
In contrast, spending for 2004 is about 20 percent of GDP, slightly below the
20.5 percent average of the past 40 years, according to the CBO.
In fiscal 2001, before the economy ground to a near halt and the Sept. 11
attacks occurred, the federal budget had a surplus for the fourth year in a row,
about $127 billion for the year. In fiscal 2004, the United States has about a 4
percent budget deficit, about $520 billion in the red, according to the CBO.
Politics and spending
The arguments about the budget and U.S. fiscal health are economic and
political. Bush has insisted the tax cuts he championed in 2001 and 2003 are
restoring the economy and should be made permanent. Bush's critics argue the
cuts made an already weakened federal budget far weaker, even before it was
asked to provide the money to finance the war in Iraq.
While Bush is estimating his budget and future plans will cut the current $520
billion budget deficit to some $237 billion by 2009, a number of budget watchers
say many future expenses are being ignored.
Those projections include:
Plans to make permanent the 2001 and 2003 tax cuts, now scheduled to end in 2009
According to the Center on Budget and Policy Priorities, the cost, or lost revenue, is about $200 billion a year but grows dramatically beginning in 2010, to about $500 billion per year by 2014, including interest payments on the debt.
Spending for the war on terror, including Iraq and Afghanistan
The administration has indicated it won't ask for more money for the wars until 2005, but then it expects to seek about $50 billion. After that, the costs aren't forecast. Steven Kosiak, with the nonpartisan Center on Strategic and Budgetary Assessments in Washington, D.C., notes the CBO estimates about $20 billion a year for future military operations through 2014.
Costs resulting from military modernization, retention expenses and increased health care costs for the Defense Department
Kosiak said Bush's budget understates the costs for what has previously been called for by Pentagon planners. Using the Bush administration's Office of Management and Budget data and historical rates of cost growth, Kosiak estimates that between 2004 and 2013, defense spending for retention, modernization and support will be $496 billion higher than is projected in the Pentagon's own plan - assuming Congress grants the full budget request each year.
Fixing a loophole in the alternative minimum tax
The tax, aimed at ensuring
that high-income earners pay some taxes every year, will hit an estimated 33
million taxpayers by 2010, up from 1 million in 1999. The tax wasn't indexed for
inflation or the current income tax cuts, which means more households earning
between $50,000 and $500,000 will be hit with the tax.
Fixing the loophole is estimated to mean lost revenue for the government between
$469 billion and $720 billion over 10 years, when interest costs for the
increased debt are included. The administration plans to spend about $26 billion
this year addressing the alternative minimum tax, or AMT. Estimates for the fix
during the next five years is about $59 billion.
Despite the possibility of that lost revenue, the current budget assumes
continued AMT revenue of about $300 billion through 2009. However, Treasury
officials have said they are reviewing the prospect of reducing or eliminating
the tax with a plan in 2005.
With the various costs, including "extenders," or additional tax cuts that
Congress regularly renews, the deficit for 2009 would be more than $400 billion,
according to the Center for Budget and Policy Priorities - not cut to some $237
billion by 2009, as now forecast in the Bush budget.
In his paper, former Treasury Secretary Rubin said the current fiscal path is
particularly difficult to maintain because the debts consume capital that could
be spent on other services, and time is not an ally: Medicare and Social
Security cost increases tied to the retirement of the baby boom generation begin
about 2011.
Rubin said governments tend not to deal with such fiscal problems until those
problems are actually felt rather than anticipated.
"But my hope would be that the more the public learns about all of these the
greater the pressure the political system will feel to become more
responsible fiscally and to deal with these issues," Rubin said during a January
conference call outlining his paper.
"But I think it is also a realistic possibility that our system really may not
deal with these issues until they're felt, and that will be a far more
difficult time to deal with them than dealing with them now."