U.S. deficit at record high and rising

Deficit? What deficit? Three big intersecting events – war in Iraq, the economic downturn, and the presidential race – this year have combined to knock fiscal discipline far down the list of Washington's policy priorities.

In fact, the federal deficit hit an all-time high of $311 billion for the first half of this budget year, reports the Treasury Department. And Congress is discussing further moves to help distressed homeowners and stimulate the economy. Iraq and Afghanistan will cost at least another $170 billion in supplemental funds through the end of next year.

Given the need, the current rush of spending might be understandable, say some deficit hawks. But they worry that Washington will use recession and war as excuses to stop caring about red ink altogether. They also warn that current deficits leave Washington ill-prepared to face an imminent explosion of spending on Social Security and Medicare caused by retiring baby boomers.

"I've spent a professional lifetime worrying about the federal budget and fiscal responsibility. And I've never been more worried than now," said Alice Rivlin, former director of the Congressional Budget Office, at a recent Brookings Institution symposium in Washington.

This February, in the president's annual budget submission to Congress, the White House Office of Management and Budget (OMB) predicted the federal deficit for fiscal year 2008 would come in at $410 billion.

That figure would represent a big jump from the fiscal 2007 deficit of $162 billion, admitted the White House. But, measured as a percentage of the nation's gross domestic product, $410 billion in red ink is well within recent historical norms, according to administration budget documents. Moreover, the "primary" reasons for the rise would be short term: the cost of the stimulus bill and a slowdown in tax receipts caused by the softening economy.

Fast-forward to April. Treasury figures now show that the deficit is likely to be larger than OMB had anticipated, since it was $311 billion through the first half of the fiscal year alone.

Why the extra red ink? The economy has been even worse than the White House predicted – and Congress increased the size of the stimulus package beyond what the administration wanted.

A 300 percent increase

Tax receipts generally pick up in the summer, so the deficit is unlikely to surpass $600 billion. But $450 billion, or even $500 billion is possible.

"There is no fiscal discipline this year, and they have an excuse to not have any: the economy," says Stan Collender, managing director of Qorvis Communications and a veteran federal budget expert. "The deficit is going to increase close to 300 percent, and nobody is saying anything."

Next year, the gap between Uncle Sam's income and outgo might increase even further. Costs for Iraq and Afghanistan will continue to mount, even if large numbers of troops begin to come home. Congress may rein in the disliked Alternative Minimum Tax, costing the government further revenue. A new president is likely to have new – possibly expensive – priorities. "It's not hard to come up with a $600 billion [fiscal 2009] deficit," says Mr. Collender.

The degree to which parsimony is out of fashion in national politics perhaps can be seen in presumptive GOP nominee John McCain's April 15 speech on his economic proposals. Senator McCain emphasized tax reductions – he proposed eliminating the federal gas tax for the summer, for instance – and did not repeat his previous assurances that he'd balance the budget in his first term in office.

At an April 2 round table hosted by the Committee for a Responsible Federal Budget, McCain economic adviser Douglas Holtz-Eakin suggested that reducing the federal budget "is not an end in itself," according to a summary of the event published by CRFB. Rather than focusing on red ink, a president should talk about all the important issues related to the budget, including the need to protect US security and help American families, he said.

10,000 new retirees a day

Meanwhile, the baby boomers will become eligible for Social Security this year. That means the long-awaited tsunami of retirees washing into federal entitlement programs is almost upon the US. Over the next two decades, more than 80 million boomers will become eligible for Social Security and Medicare. That's about 10,000 people per day. By definition, spending for these programs is on auto-pilot. More beneficiaries means higher federal spending – much higher.

Due to entitlements, "without fundamental changes in our tax policy and our spending policy, deficits are going to grow from the rather benign levels that we've experienced in the last couple of years to levels that this nation has not experienced in peacetime," said Robert Reischauer, also a former CBO chief and president of the Urban Institute, at the Brookings symposium.

A bipartisan group of experts organized by Brookings and the Heritage Foundation recommends that Congress enact explicit long-term budgets for Medicare, Medicaid, and Social Security, and set limits on the automatic entitlement spending growth. Such action would force Congress to make trade-offs between entitlements and other fiscal priorities.

"What our proposal does is put those programs on the same playing field, if you like, as other programs," said Stuart Butler, vice president of domestic and economic studies at the Heritage Foundation. "There should be an orderly discussion about the commitment we make and how money is allocated and so on."