Deficit Reduction

THE BALTIMORE SUN

The budget deficit has been the spectral issue of thi campaign, a threatening presence only rarely glimpsed.

Yet it is the major long-term problem facing the economy. If putting America back to work is the nation's first priority this election year, then keeping it there must be its second. Almost everyone agrees the deficit must be reduced if the United States is ever to prosper again.

Ross Perot, the independent candidate who has made deficit-reduction the focus of his underdog campaign, likens the deficit to the crazy aunt in the basement who everyone knows is there but no one wants to talk about.

President Bush and Gov. Bill Clinton have preferred to focus on economic growth as the prerequisite for long-term deficit reduction.

As economist Henry J. Aaron wrote in a 1990 economic treatise -- "Setting National Priorities, Policy for the Nineties" -- for the liberal Brookings Institution: "The federal deficit has been around long enough to seem normal -- and boring. While the deficit has lost its capacity to shock, it has not lost its power to damage the economy."

Two years later his words ring truer than ever. The deficit has deepened, and the country'sstruggle to escape from the aftermath of recession has been slow and painful. With less than a week to go to election day, it is time to bring the deficit into fine focus.

(defi.cit (def'asit), n., (L. There is lacking, 3d. pers. sing., pres. indic., of deficere ...): the amount by which a sum of money is less than the required amount; spec., an excess of liabilities over assets, of losses over profits, or of expenditure over income.

-- Webster's New World Dictionary

In plain English it sounds negative. In simple economics it is.

What is the budget deficit?

The deficit is the amount by which federal government outlays exceed receipts. The figure varies from year to year, but the country has routinely operated in the red for two decades.

How big is the deficit?

The Bush administration early this year estimated that the deficit for fiscal 1992, which ended September 30, would be $399 billion. In its mid-year review it reduced this to $333.5 billion, and it could turn out to be even lower when the final figures are in. The reduction is largely due to $69 billion less than expected being spent on the savings and loan bail-out. Congress refused to earmark the latest necessary funds for the latest phase of the bail-out, but the cost of closing failed financial institutions will eventually have to be met by the taxpayer, swelling some future deficit. The 1992 deficit will represent about 5 percent of gross national product, exceeding the 4.1 percent annual average of the 1980s, and more than twice the 2.1 percent average of the 1970s. The Congressional Budget Office forecasts the average ration during the 1990s will be 4 percent.

How long have we lived with an annual deficit?

There has been a budget deficit every year since fiscal 1961, with the exception of 1969, but the major explosion began in the early 1980s with the Reagan defense buildup and tax cuts.

How did the deficit grow so big?

Three basic forces have driven the deficit upward over the past 20 years: general tax cuts, increased defense spending, and the escalating cost of retirement and health care. Health care costs, as a proportion of gross domestic product (GDP), rose from 1.7 percent in 1979 to 2.7 percent in 1990. The interest costs of current huge deficits are also adding to the problem. Interest payments absorbed 1.8 percent of GDP in 1979, 3.4 percent in 1990. When the economy goes into recession, the amount of money the government can collect in the form of taxes from successful businesses and working Americans is reduced. But the cost of many programs -- unemployment benefits, for example -- continues to rise. An aging population also adds incrementally to burgeoning federal outlays. The government has to go into debt to keep itself in business.

Who is to blame for deficits?

Budget bills, which determine how much the government spends and on what, are passed by Congress and signed by the president. There is, therefore, a joint responsibility. Mr. Bush has campaigned for a line item veto that would enable him to block particular outlays in comprehensive spending bills that reach his desk, but at the moment he must either sign the entire bill or veto it. Mr. Clinton wants similar power to fillet legislation. Beyond the discretionary spending set by the budget process each year, there is a block of mandatory programs that do not require annual appropriations. They include Social Security, Medicare for the elderly, and Medicaid for the needy, and they increase automatically. Their accelarating growth is one of the major causes of modern deficits. As Richard G. Darman, the Bush administration's budget director observed in the fiscal 1993 budget document: "They just keep on going and growing automatically. Sometimes referred to as 'uncontrollable,' these programs are clearly out of control."

Mandatory programs for 1993 will cost $766.8 billion, accounting for more than half the federal budget, more than double the 23 percent proportion they represented in the Kennedy administration. All three presidential candidates would restrain their growth, with Mr. Perot suggesting the most severe cuts.

Why doesn't Maryland have a deficit?

Maryland is one of 49 states that have balanced budget requirements (Vermont is the exception). This means that by law they cannot operate on borrowed money. The discipline this imposes produced the recent dramatic cuts in state spending announced by Governor William Donald Schaefer.

What is the difference between the deficit and the national debt?

The national debt is the sum of all previous deficits. It currently totals $4.1 trillion. The country has had a national debt basically since 1790. The amount has varied, depending on the cost of government in any period. For example, in 1947, after the paying the costs of World War II, the national debt represented 127.6 percent of GDP, the nation's total output in goods and services. In 1981, at the peak of a normal business cycle, it was down to 33.3 percent of GDP. Today, after the yearly deficits of the last decade have been added to it plus the one-off costs of Desert Storm in Kuwait and the savings and loan bail-out here, it is back up to 69.5 percent of GDP.

How much interest is paid on the debt?

The interest paid in 1992 was $199.1 billion, or approximately $800 a year for every man, women and child in the country.

(deficit financing, Econ., the practice of seeking to stimulate a nation's economy by increasing government expenditures beyond revenue sources (deficit spending): the budget deficit is financed by borrowing.

What economic impact does the deficit have?

The most serious impact of the deficit is it absorbs money that would otherwise be available for the vital savings and investment sectors of the economy. In this recession the massive federal debt overhang has prevented Congress from using the normal fiscal stimulus -- public spending and tax cuts -- to boost economic activity, prolonging the downturn. The large deficit also forebodes future inflation, and, in response, long-term interest rates are kept high by traders hedging against the expected price increases. High long-term interest rates hold back construction and major capital investment. All of this hinders U.S. productivity growth and increased competitiveness, which in turn put the brakes on improvements in living standards. The deficit also inhibits the nation's ability to fund adequate human services, including education, training, and health care. As it increases, interest payments go up in what the Congressional Budger Office calls "a vicious cycle of more federal borrowing and higher debt service costs, which in turn make it even more difficult to reduce the deficit."

In short: it undermines the American Dream.

How does the deficit affect the individual?

It reduces employment prospects, holds back wage increases, and generally depresses living standards. It leaves future generations with an inherited debt load to repay, reducing their economic prospects.

How can the deficit be reduced?

There are three basic ways: stimulate economic growth to bring in more government revenues; cut spending to reduce outlays; increase taxes to boost receipts. Congress has repeatedly tried to get a handle on the deficit. Most recently, in 1990, it passed the Budget Enforcement Act (B.E.A.), which was signed by President Bush, to restrain spending and increase taxes. Spending caps were placed on defense, domestic and international spending. The caps expire in 1995. Under the B.E.A., funds from any one category can not be transferred to another. Any new spending has to be offset by cuts in other programs or new taxes. The agreement was supposed to cut $500 billion from the deficit over fives year. When the bill was passed the five year deficit for 1991-1995 was projected to add up to $770 billion. It is now thought likely to be almost twice that at $1.4 billion. Government spending, which was supposed to have been cut by the agreement, has grown $118 billion in the past two years, 20 percent above inflation, driven mainly by entitlement programs.

The Congressional Budget Office publishes a yearly compilation spending and revenue options open to congress and the administration to reduce the deficit. This year's book has 47 specific ideas for cutting defense expenditures, 54 for cutting non-defense domestic discretionary spending, and 66 for cutting entitlement outlays. It also lists 36 ways for the government to increase its revenues.

Most of Ross Perot's deficit-cutting proposals come straight out of the CBO book.

The reason so little action has been taken in Washington is that most of the measures involve considerable financial pain for the voter, a politically dangerous infliction.

But, as the General Accounting Office pointed out in its analysis of the deficit problem earlier this year: "The economic and political reality is that the nation cannot continue on the current path. The question is when and how to act to reduce the defificit...The sooner action is taken to bring the deficit under control and to make the composition of federal spending more conducive to investment, the less the sacrifice, and the greater the benefit,"

What would the candidates do about the deficit?

George Bush: Halve the deficit in four years. He rejects tax increases, opting to rely on stimulating growth with an across-the-board income tax cut offset by equivalent "appropriate" spending cuts, a $5,000 tax credit and penalty-free use of IRA's for first-time homebuyers, and investment incentives, including 45 percent capital gains exclusion. He would cut spending by freezing discretionary outlays and capping the growth of entitlement programs to inflation and the increase in eligible population. He also proposes to allow taxpayers to earmark 10 percent of their federal taxes for direct deficit reduction. He supports creation of federally-encouraged enterprise zones. Health care reform and cost containment are an integral part of his deficit reduction proposals. He is a strong advocate of a balanced budget amendment and a line item veto.

Bill Clinton: Halve the deficit in four years. He would impose 36 percent income tax bracket on joint returns above $200,000, and levy a 10 percent surtax on millionaires. He would seek greater tax compliance from foreign corporations, and would strip tax breaks from U.S. companies closing plants and shipping jobs abroad. He favors a tax break for middle-class families with children. He would allow a 50 percent capital gains exclusion oninvestments in new small businesses, and give tax credits for research and development. Medicare supplemental costs would be increased for those with incomes over $125,000. He would cap executive pay deduction at $1 million and eliminate expense deduction for lobbying activities. He would reform the health care system to offer universal coverage, with cost containment a major element. He favors a line item veto, but opposes a balanced budget amendment.

Ross Perot: He differs from the other two in that he makes deficit reduction his top priority. His program is designed to create an $8 billion budget surplus in 1998. In the process he would boost taxes by $348 billion and reduce spending by $413 billion over five years. He would increase the top income tax bracket from 31 percent to 33 percent, limit mortgage interest deduction to $250,000 of principal, and disallow deductions on vacation homes. He would tax executive health benefits above $335 per month for a family or $135 for an individual. Wealthy retirees would be taxed on 85 percent of their Social Security benefits instead of 50 percent, and he would lift the current $130,200 income cap on Medicare taxes. Users of Medicare supplemental program would pay 35 percent as opposed to the current 25 percent of the costs. He would reduce from 80 percent to 50 percent the deduction for business meals and entertainment, and increase tax collection from foreign corporations. The current 14 cent federal gasoline tax would be increased by 50 cents over five years, and the tobacco tax, currently 21 cents per pack and due to go to 24 cents next January, would be immediately doubled. Mr. Perot would also pressure Japan and the Europeans to pay a fairer share of defense costs.

(surplus (sur'plus, - plas) n.....1) a quantity or amount over and above what is needed or used; something left over; excess. 2) the excess of the assets of a business over its liability for a given period..."

--Webster's New World Dictionary

This sounds positive, and would be.

What would life be like without a deficit?

In his recently published book "Memos to the President: A guide through Macroeconomics for the Busy policy maker," Charles L. Schultze, President Jimmy Carter's chief economic adviser, examines a scenario where a projected $250 billion deficit is turned into a $70 billion surplus by 1997 followed by two decades in the financial blue. This, he says, would at the end of the period increase the annual level of national income by up to 6 percent, and consumption, after an initial decline, by up to an extra 2 percent. American living standards would rise. Investment would increase, and, even more significantly, so would "developments connected with the advance of human knowledge, specifically the quantity and quality of education and the advance of technological progress."

Mr. Schultze, asserting that the long-term gain of deficit reduction is worth the short-term pain, concludes: "The game is worth the candle."

Where can you learn more about the deficit?

Budget of the United States Government, Fiscal Year 1993. This contains the official figures and projections. Available from the Government Printing Office. Phone: 202-783-3238. Price: $43.00.

Mid-Session Review: The President's Budget and Economic Growth Agenda. This gives a mid-year update of the administration's economic projections and plans. Available from the White House Office of Publications. Phone: 202-395-7332. Free.

Reducing the Deficit: Spending and Revenue Options, a February, 1992, report to the Senate and House Committees on the Budget by the Congressional Budget Office. Details various specific ways of cutting the deficit. Out of print. New volume printed next February.

An Analysis of the President's Budgetary Proposals for Fiscal Year 1993, a report to the Senate Committee on Appropriations by the Congressional Budget Office. Available from Congressional Budget Office, Publications Division. Phone 202-226-2809. Free.

Budget Policy - Prompt Action Necessary to Avert Long-Term Damage to the Economy. A report to Congress by the U.S. General Accounting Office. Lucidly written, graphically displayed outline of the deficit problem. Available from General Accounting Office: 202-275-6241. Free.

An Illustrated Guide to the American Economy: 100 Key Issues, by Herbert Stein and Murray Foss. Solid primer on the economy, prepared for the conservative Economic Enterprise Insitute for VTC Public Policy. Available from National Book Network. Phone 301-459-3366. Price: $14.95.

Setting Domestic Priorities. What Can Government Do?, a series of straightforward analyses of current economic and social problems, edited by Henry J. Aaron and Charles L. Shultze. Produced for the liberal Brookings Institution. Available from Brookings bookstore. Phone 800-275-1447. Price: $14.95.

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