President Bush is set to release his proposed 2004 federal budget on Monday. It will detail how the White House believes the government should spend the tax dollars it will collect from all of us.
This annual event sets off a months-long tug-of-war over the competing priorities of Republicans, Democrats, lobbyists, and other interests. More for education. More for defense. What about housing? Transportation? Medical care? Homeland security?
No matter how the federal budget gets sliced this year, one item won’t change much. The budget is guaranteed to contain a “net interest” entry. That’s the money that must be set aside each year to pay interest on the mounting national debt–now nearly $6.4 trillion.
Over the last 40 years, the “net interest” column has been as low as 6.2 cents out of every dollar (1968) spent and as high as 15.4 cents of every dollar (1996). Each year between 1981 and 2001, it totaled more than a dime of every dollar.
As deficit spending surged into the hundreds of billions in the 1980s, the cost of servicing that mountain of red ink also grew. The nation had a brief fling with spending less than it took in, but that ended abruptly in 2001 because of the aftermath of the burst economic bubble, the costs of homeland security and the war on terrorism.
Now the deficits are rising again. The deficit last year totaled $159 billion. The Congressional Budget Office reports that the current-year deficit is expected to hit $199 billion. The White House has hinted that its proposed budget will include a record deficit of more than $300 billion.
In the midst of a sluggish economy and potential military confrontation with Iraq, there is little concern in Washington about higher government deficits. But there must be. Deficits matter.
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Why should taxpayers be concerned if the government spends money it doesn’t have? Several reasons.
Interest on the federal debt takes money that could be spent on guns or butter or both.
The government expects to pay about $180 billion in net interest this year. That’s more than it will spend on education, transportation, energy conservation and science research–combined.
That’s money that will buy nothing–it will pay for money that was borrowed and has already been spent.
Government debt also pushes up long-term interest rates for everyone who seeks to borrow money. Heavy federal borrowing bids up the cost of credit. Higher rates make borrowing and investment more expensive for everyone.
The government is coming off those four rare years when it ran a surplus, and the economy is sluggish now, so there isn’t a lot of demand for credit. Interest rates remain near 40-year lows. But when business and investment activity pick up, rates are likely to rise as the government and the private sector compete for credit. And it appears likely that the government’s appetite for credit will be growing.
Chronic deficit spending also makes it that much harder to grow the economy, expanding the nation’s capacity to produce goods and services. That growth requires investment and the amount available for investment is reduced when national saving (the total of private sector and government surpluses) declines, argue two Brookings Institution economists, William Gale and Peter Orszag, in “The Economic Effects of Long-Term Fiscal Discipline,” published in December.
They aren’t concerned with the government running short-term deficits. It’s the year-in, year-out bad habit that adversely affects long-term rates and economic performance. Their conclusion is supported by research, macro-econometric models and the views of leading academics, policymakers and government agencies, including the Federal Reserve Board and former White House economic advisers.
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Budget projections, of course, are just that–projections. The frenzied economic activity during the late 1990s boom produced tax revenues that, month after month and year after year, exceeded expectations. That helped to produce those four years of surplus. An economic surge higher than that projected by government economists will ease the dire deficit projections.
But remember this. The Congressional Budget Office projections, which anticipate deficits at least until 2007, don’t include the impact of President Bush’s proposed new round of tax cuts, or the expense of war in Iraq, a prescription drug program for senior citizens, homeland security and spending proposals on Democratic and Republican wish lists.
President Bush committed himself in his State of the Union address to holding discretionary spending to an increase of no more than 4 percent next year. That’s all well and good, but Congress has generally had other ideas. Bush ran into stiff congressional resistance when he sought to limit discretionary spending last year to 7 percent. Discretionary spending has routinely exceeded the rate of inflation. Nobody is starving the beast.
The beast is about to get much hungrier. Forty years ago, about 30 cents of every dollar in the budget went to pay for entitlement spending, which primarily goes to the elderly and the poor. That has now grown to almost 58 cents of every dollar–and that will rise as the giant baby boom generation starts to collect its Social Security and Medicare benefits.
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The borrowing pattern should be put in some perspective. The $200 billion-plus budget deficit in 1983 amounted to about 6 percent of the nation’s gross domestic product at that time. The economy has expanded, so even a projected $300 billion deficit now would be about 3 percent of GDP. The latest rounds of borrowing may have a less dramatic short-term impact on the economy than borrowing did in the 1980s.
But there’s no way around this: The cost of the government’s obligations is about to soar, deficit spending is on the rise, the overall debt has soared close to $6.4 trillion and there is little political will for fiscal discipline.
There’s a good reason deficit spending is popular with politicians. It has the appearance of a free lunch. Today’s taxpayers are barely aware of how much of their money is diverted to debt payments, and the reckoning over Medicare, Medicaid, and Social Security can be put off for tomorrow’s taxpayers.
That can’t be allowed to happen. Deficits matter. They matter today. The will matter tomorrow.
