Alice M. Rivlin and Michael O'Hanlon

Candidates need to get real on budget issues

We hear that Ralph Nader is running again, but the third-party candidate we need is Ross Perot. In 1992, with his squeaky voice and endless charts, Perot focused attention on the rising federal deficit. His warnings helped keep the major-party candidates from talking budgetary nonsense.

For all of their impressive qualities, this year's presidential candidates are woefully short on fiscal prudence. And the next president will face two daunting budget problems. The winner will inherit a large deficit resulting from a weak economy, an expensive war and the persistent political inclination to spend more and tax less. The bigger challenge? Promises made to the growing population of retirees as health care spending continues to soar.

The GOP, once the party of fiscal and social conservatism, has lost the budgetary high ground. During George W. Bush's presidency, Republicans have cut taxes massively, launched a war without paying for it, added costly drug benefits, exercised little restraint on domestic spending during the six years they controlled Congress, and allowed deficit-restraining budget rules to lapse. Fiscally prudent Republicans should worry that their standard-bearer is calling for about $300-billion a year in new tax reductions and new military spending with few credible ways of paying the bill.

Meanwhile, Democrats, who complained that Bush asked us only to go shopping after the attacks of Sept. 11, 2001, should worry that their leaders are more intent on proposing huge initiatives in health care and energy — while preserving Bush's tax cuts for all but the wealthiest — than in heeding John F. Kennedy's call to sacrifice for the common good.

Bush inherited a $236-billion surplus, while the next president will inherit a deficit likely to top $400-billion. Federal debt, which fell to 57 percent of gross domestic product during the Clinton administration, is back up to about 68 percent, the highest percentage since the 1950s. Interest on the federal debt tops $200-billion a year, so we have to move quickly to avoid losing ground. Moreover, deficits are increasingly being financed by other countries, making us increasingly vulnerable to their agendas.

All the candidates claim that their initiatives would not make future deficits bigger, but many of these claims are shaky at best. John McCain would make the Bush tax cuts permanent, cut corporate tax rates, repeal the alternative minimum tax and increase personal exemptions. He would offer every family a $5,000 refundable tax credit to buy health insurance, add to veterans' health care benefits and deploy a large-scale missile defense. His team estimates that these tax cuts and spending increases would add roughly $300-billion a year to the deficit.

To offset these costs, McCain proposes cutting "pork" and waste, freezing discretionary spending for a year and hoping for increased economic growth thanks to his tax cuts. But earmarks are often seen by voters and their representatives as worthy local projects, and research shows that tax cuts have modest growth-inducing effects when top tax rates are in their current range. Even assuming that a stronger economy generates more revenue, that McCain has extraordinary success in restraining domestic spending and that he succeeds in halving our presence in Iraq in four years, it is highly unlikely that these offsets would wipe out even half of the $300-billion proposed annual increase in the deficit.

Barack Obama advocates a major expansion of health care, emphasizing the coverage of children; extension of the Bush tax cuts for all but high-income households; a new national infrastructure fund; substantial energy and education initiatives; and a doubling of foreign aid. He proposes paying for this by eliminating the cap on payroll taxes and ending the war in Iraq. All this would increase deficit spending by more than $100-billion a year — on top of the existing predicament — assuming we really do get most of the way out of Iraq on his watch. Hillary Clinton's overall plans are similar, with more spending on health care than Obama proposes, less on infrastructure and foreign aid, and a plan to recoup some oil company profits.

Worse, no candidate is facing the fiscal time bomb of health care entitlements. Medicaid and Medicare together cost 4 percent of GDP. The Congressional Budget Office estimates that their cost will rise to 7 percent of GDP by 2025, 9 percent by 2035 and 12 percent by 2050. Even if these health spending pressures can be mitigated by reforming the health care system, they will lead to unsustainable deficits unless reform is accompanied by tax increases or drastic cuts in other spending.

None of the candidates can solve all these problems in campaign speeches and still have a chance to win. But they could promise not to make deficits worse. With his bold tax cuts and increases in defense spending, John McCain looks likely to do the most fiscal damage, but the Democrats are not far behind.

Alice M. Rivlin and Michael O'Hanlon are senior fellows at the Brookings Institution.

Candidates need to get real on budget issues 05/29/08 [Last modified: Monday, June 2, 2008 1:43pm]

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