Why the budget deficit is so hard for Congress to shrink

Congress has less and less leeway for closing the budget deficit as outlays for entitlement programs grow.

Why are members of Congress making a federal case out of cutting government spending? You just get out your paring knife and whittle a little or a lot, as the case may be, out of things like the Amtrak subsidy, defense contracts, NASA, and education grants. Right?

Not so fast. Even if Congress takes a machete to those kinds of government expenditures – called discretionary spending – it will barely make a dent in the budget deficit. That's because a growing share of the US budget is dedicated to entitlement programs for retirees and the indigent and to paying interest on the national debt – none of which is part of Congress's annual budget cycle or easy to reduce.

Fifty years ago, Congress had greater control. More than two-thirds of federal spending fell into that discretionary category. Next fiscal year, discretionary spending is expected to account for just over one-third of the budget pie. Rule out cuts in defense spending (which many lawmakers want to do), and the share of the budget over which Congress has discretion falls to 12 percent.

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That's why focusing cuts on high-speed rail or public broadcasting won't do much to contain soaring federal deficits and an unsustainable national debt, analysts say.

"Domestic discretionary spending is a very small area of the budget," says Maya MacGuineas, president of the Committee for a Responsible Federal Budget, a bipartisan group dedicated to educating the public about fiscal policy. "You're not going to fix this massive problem by focusing on this tiny slice of the budget pie."

The giants of the budget, Medicare and Social Security, "are on autopilot," and their outlays are rising at a faster clip than the economy, she adds. "If you don't fix the problem area of the budget, then the problems are going to stay. That's the problem."

Such pronouncements have long been a staple of blue-ribbon fiscal panels, most recently President Obama's National Commission on Fiscal Responsibility and Reform. But with the first of the baby boomers eligible to retire this year, the matter is taking on greater urgency. If current policy does not change, rising retiree health costs and claims on Social Security will propel mandatory spending to levels never seen before, squeezing out room for future discretionary spending.

Here's the glide path the US is on:

•By 2025, Medicare, Medicaid, Social Security, and interest on the federal debt would claim all federal revenues.

•Interest on the national debt would rise to nearly $1 trillion nine years from now, up from $200 billion today.

•US debt held by the public would grow to 185 percent of the national economy by 2035, driving up interest rates and lowering growth and living standards.

With a presidential election cycle already ramping up, neither the White House nor congressional leaders are eager to be the first to touch popular entitlement programs, known as the "third rail" of American politics. In the past, even suggesting the need for cuts has been a death blow to political candidates.

Mr. Obama's $3.7 trillion budget plan for next year proposes a five-year freeze on nonsecurity discretionary spending in a bid to cut $400 billion over 10 years. That would bring discretionary spending to "the lowest share of the economy since Dwight Eisenhower," Obama said Feb. 15 during a press conference.

He would cut or eliminate more than 200 programs, including one that helps low-income Americans pay home-heating costs, block grants for community development, and Pell grants for low-income college students. Most cuts phase in after the 2012 campaign. The plan includes, too, $1.6 trillion in tax hikes and new investments in education, science, and technology "to win the future."

"We've taken a scalpel to the discretionary budget rather than a machete," the president said.

Contrary to the advice of Obama's fiscal commission, his budget map punts entitlement reform to future negotiations as far as two years out.

"This is going to be a process in which … both chambers of Congress ... start trying to whittle their differences down, until we arrive at something that has an actual chance of passage," Obama said. "This is a matter of everybody having a serious conversation about where we want to go and then ultimately getting in that boat at the same time so it doesn't tip over. And I think that can happen."

House Republican leaders call the president's budget plan a failure of leadership and a lost opportunity.

"We need to have an adult conversation on entitlements, and the president needs to lead that discussion," said Speaker John Boehner at a Feb. 17 press briefing. "He was elected to lead, not to sit on the sidelines. And it's also clear that we need to have a conversation with leaders in his own party who continue to deny there's even a problem."

In a pre-dawn vote on Feb. 20, the House voted to cut $61 billion from discretionary spending this fiscal year, which ends Sept. 30. Currently, the government is funded only through March 4.

On Tuesday, Senate Democrats proposed extending current spending levels for 30 more days, to April 3. Senate majority leader Harry Reid, citing the fiscal commission, says making federal spending cuts too soon could derail the nation's economic recovery. He is also drawing a line on future cuts to Social Security benefits. Social Security is not a factor in the US budget deficits and ought to be protected from cuts, he says.

"Congressional Republicans and the president are playing a game of budgetary chicken," says Steve Ellis of Taxpayers for Common Sense, a budget watchdog group. "Neither one ... wants to tackle entitlements or tax expenditures before the 2012 election. It may make for good electoral politics, but it's fiscally irresponsible."

Meanwhile, hopes for a breakthrough on deficit reduction rest on a bipartisan group in the Senate, launched by senators who served on the president's debt commission. Picking up conclusions of the commission, the group is addressing entitlement reform, an end to tax breaks, and caps on discretionary spending. But it's premature to say the senators are near agreement. "The group is committed to deficit reduction but nowhere close to a plan," an aide says.

In the 1990s, Congress instituted fiscal self-discipline by capping discretionary spending. Gradually, exceptions to those rules, including financing two wars, have blunted their usefulness. At the same time, entitlements have come to account for a larger share of US spending. The new wild card is how soon interest-rate hikes, expected as the economy recovers, will balloon payments on the national debt. It's the one element in the spending mix that Congress cannot legislate away.

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