Federal Deficit A Nightmare for Our Children

San Jose Mercury News, February 8, 2004
By Leon E. Panetta
On March 2, Californians will decide whether the state should assume $15 billion in added debt to help reduce a huge budget deficit. At the national level, President Bush last week presented a federal budget that projects a record annual deficit of $521 billion, and if tax cuts become permanent, the national debt could grow by a staggering $2 trillion to $3 trillion over the next decade, nearly a 50 percent increase.

This era of ”borrow and spend” tempts me to think about another kind of debt — the debt we owe our parents and earlier generations for their sacrifices for us. By contrast, we are damaging the future for our children.

My Italian parents were immigrants to this country in the 1930s. Like millions of other immigrants, the reason they came here is that they wanted to give their children a better life. That is the fundamental American Dream — improving the lives of our children. To do that, my parents, our forefathers, the pioneers, and other immigrants believed that you had to be disciplined, you had to be willing to work hard, and sacrifice for others, and you always had to prepare your families and the nation to avoid the problems of tomorrow.

That meant that the budgets of families and the government had to be designed to secure the future, not to mortgage it.

Those values appear to have gone out the window in recent years. The guiding principle for both the president and the Congress appears to be ”get what you can today, and to hell with tomorrow.”

How else does one explain the reckless tax cuts, the $534 billion cost of the new prescription drug bill, the 31.5 percent increase in defense and domestic spending over the past three years and the large funding for pork-barrel projects that Sen.
John McCain described as Congress ”spending like drunken sailors”?

Although the president’s newly proposed budget for the next fiscal year claims to reduce the deficit by half over five years, it fails to acknowledge that if the tax cuts that the Bush administration seeks to make permanent are approved, the cost over 10 years is $2.2 trillion, according to estimates from the Joint Committee on Taxation and the Congressional Budget Office.

In addition, if all tax cuts set to expire between now and 2010, such as the research and development tax credit, are extended, the debt will be increased by another $1 trillion on top of that.

Borrowing binge

Now add in the continuing costs of the conflicts in Afghanistan and Iraq, along with the increased defense and homeland security spending and the exploding costs of entitlements, and it becomes clear that instead of reducing the deficit, this nation is embarking on an unprecedented borrowing binge that neither the president nor Congress appears willing to stop.

When Bush took office in January 2001, there was a projected 10-year surplus of $5.7 trillion and the government had a balanced budget. Now the national debt is about $7 trillion and obviously will grow.

The reality is that there is little or no discipline left in the congressional budget process. The purpose of budget resolutions under the 1974 Congressional Budget Act was to define clear priorities and to set enforceable spending limits. Budgets now are cast aside each year with limits easily broken by appropriations bills and supplemental funding requests.

Important budget enforcement tools implemented in 1990, like caps on discretionary spending and the so-called ”pay as you go” rule that required that any new spending program or tax cut be paid for, have been allowed to expire.

While the administration is now proposing to restore these enforcement tools in its budget, it has seriously weakened them by saying they should not apply to tax cuts. In other words, borrowing for huge tax cuts is acceptable.

Adding to the congressional irresponsibility is the fact that the president has yet to veto any spending bill by Congress. That is a clear signal that the spending doors are wide open, and that we are experiencing perhaps the most irresponsible fiscal period in America’s history.

President Bush constantly reminds us that the nation has had to face unprecedented crises and costs in fighting the war on terrorism and in dealing with an economic recession. And yet in the face of these challenges to the nation, he has demanded little sacrifice on the part of all citizens.

In the past, the American people have been asked to assume their rightful responsibility for protecting the nation at home and abroad. This has been true for every major war in our history. Today, while our fighting men and women are making the greatest sacrifice of all on the battlefields of Afghanistan and Iraq, the rest of us are encouraged to enjoy new tax cuts and increase our personal spending.

Unlike the case with the Persian Gulf War, the $87 billion in costs for Iraq and Afghanistan over the past year were added to the nation’s debt. And in the president’s new budget, next year’s costs of the war are not included.

Finally, little is being said about the exploding costs that our nation will face in the next decade or more. There is a major demographic shift occurring in our society. Over 70 million baby boomers will start retiring in the next 10 to 20 years.
Life-expectancy rates are increasing by as much as 22 percent, while fertility rates are going down. As a result, federal expenditures for Social Security, Medicare, Medicaid and veterans’ health care benefits are expected to dramatically increase. All of this occurs at the same time that we are looking at a decreasing revenue base.

Declining workforce

Federal revenues are now at their lowest level since 1950 as a share of the economy. If tax cuts are made permanent, federal revenue will further decline.

This crisis is aggravated by a serious slowdown in the growth of the American workforce, which in the first half of the 21st century is expected to grow by only 0.4 percent annually. That means fewer workers supporting the programs that will be serving their parents and grandparents.

This combination of ”borrow and spend” fiscal policies combined with the clear projections of higher expenses in the future presents an unprecedented fiscal challenge. It is a challenge that not only will place a huge burden on our children, but could also seriously threaten any hope for economic recovery at the present time.

Make no mistake, deficits do matter to our economy. They will reduce economic growth as the federal government is required to borrow more money from the capital markets, crowding out productive private investment. They will raise interest rates on what families pay on their mortgages and on credit cards.

Deficits will increase the volatility of currency markets as we become more and more dependent on foreign borrowing and indebted to other nations. They will reduce the necessary resources needed to invest in the future.

No country can improve its living standards without investing, and no country can invest without saving.

But perhaps the most serious impact of these huge deficits is the burden placed on our children to pay the interest on the debt.
The interest is estimated at $300 billion a year. For those concerned about tax increases, this is the most regressive tax of all.

Time for outrage

The tragedy is that neither the president nor any of the Democratic presidential candidates, for that matter, has presented an honest and credible plan to reduce deficits. The lessons of the past are
clear: Reducing deficits requires leadership to both cut spending and raise taxes. The president’s father and President Clinton understood this, and their fiscal leadership paid off in a period of balanced budgets and economic growth.

The question for 2004 is whether the tough choices will be made by the leadership of the nation or driven by economic crisis.

If the American people are not outraged by this fiscal irresponsibility, ifthey do not demand action and indicate a willingness to sacrifice, and if they fail to make this an important issue in the presidential campaign, then little will be done and the consequence will be crisis.

That will not only damage our economy but also undermine the pledge that our parents made to us and that we must make to our children — that we will do everything possible to make their lives better and to fulfill the American Dream. That is the only debt we should pass on to them.

Leon Panetta’s column appears every other month in Commentary. Readers may write to him at the Panetta Institute, 100 Campus Center, Building 86E, CSU-Monterey Bay, Seaside 93955.


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