America’s Deficit Falls, Long Term Fiscal Challenges Remain

A shrinking deficit seems to have affected lawmakers’ sense of urgency. But a problem remains.

The United States Capitol in Washington DC, May 13, 2013
The United States Capitol in Washington DC, May 13, 2013 (TimTalerJr)

Opposition Republicans in the United States have been notably silent of late about the imminent fiscal crisis they predicted. That isn’t surprising. The deficit is falling so the policies they recommended to shrink it faster, which weren’t always popular to begin with, seem less urgent.

Which isn’t to say that reforms aren’t still needed to prevent the national debt, which grew more than 50 percent through President Barack Obama’s years in office, from rising further.

After four years of running deficits that exceeded $1 trillion, the Congressional Budget Office predicts that the country will post a shortfall equivalent to 4 percent of economic output this fiscal year and 2.1 percent in 2015.

That is rather in spite than because of the president’s policies, however. The deficit is falling thanks to recovering economic growth, the expiration of his stimulus program and spending cuts initiated by Republicans, who are in the majority in the lower house of Congress, when members of Obama’s own party, who control the Senate, would have preferred to raise taxes more.

Longer term, the fiscal outlook is less rosy. The federal debt is already at 73 percent of gross domestic product. Including the debts of local and state governments would cause the figure to rise to 103 percent.

The rise in health-care costs unexpectedly slowed this year, also contributing to lower deficit projections, but this respite will not last, pushing up the costs for entitlement programs, including the president’s own health reforms, from 9.8 percent of GDP this year to 13.6 in 2035.

During that period, they will claim an ever expanding share of the federal budget. As early as 2025, tax revenues could be sufficient only to cover these “mandatory” spending commitments, even excluding unemployment compensation and leaving nothing for “discretionary” spending on defense, education and infrastructure.

The number of beneficiaries from Social Security is expected to increase one and half million annually for at least two decades, widening the gap between what Americans contribute to the program in payroll taxes and what it is supposed to pay out–to 1.5 percent of GDP by 2035.

Between now and 2085, the pension program’s own trustees estimate a total shortfall of $9.1 trillion.

To eliminate it, the United States could raise payroll taxes or link benefits to incomes. Neither proposal will be very popular but the most commonsensical solution alone, raising the retirement age, will not solve the problem.

Medicare, which finances health care for retirees, may be even harder to fix. Democrats strongly objected to Republican proposals to liberalize the program, giving seniors a fixed subsidy with which to buy either traditional Medicare coverage or a private insurance plan. They argued that it would “end Medicare as we know it.”

Republicans will similarly resist progressive plans to replace the general tax deduction for health insurance, which costs some $200 billion per year, with a scheme that insulates only the lower incomes.

The one proposal both parties might endorse is to force doctors and hospitals to disclose their prices, letting prospective patients know how much their care will cost and improving competition across the medical services industry.

But such competition is simultaneously undermined by the president’s health reform law which empowers an Independent Payment Advisory Board to identify which drugs and procedures should be covered under Medicare, denying consumers choice.

The president, despite repeatedly addressing the crisis and claiming that he is willing to make “hard choices,” has actually given little indication that he intends to push his party to accept such choices in a compromise with Republicans who, for their part, condition their support for further health reforms on the repeal of what they call Obamacare. This deadlock may not be broken until either party manages to take control of both branches of government and imposes a solution on its own terms.