America Cannot Afford a Huge Deficit

Peter R. Orszag and
Peter R. Orszag Vice Chairman of Investment Banking, Managing Director, and Global Co-Head of Healthcare - Lazard
William G. Gale
William G. Gale The Arjay and Frances Fearing Miller Chair in Federal Economic Policy, Senior Fellow - Economic Studies, Co-Director - Urban-Brookings Tax Policy Center

February 5, 2003

This year’s US budget proves that George W. Bush is no Ronald Reagan. In 1981, President Reagan signed massive tax cuts into law. The next year, realising that the budget outlook had deteriorated more than expected, he reversed about a third of the tax cut – limiting its adverse effects on the budget. Even with that adjustment, the nation suffered substantial budget deficits throughout the 1980s.

It is now clear that Mr Bush’s tax cut of 2001 is also too large. In the face of pressing security needs and the coming retirement of the baby-boomers, the nation cannot afford it. Rather than reversing part of the tax cut, however, Mr Bush wants to expand it and make it permanent. The administration’s budget proposes Dollars 1,460bn (Pounds 910bn) in new tax cuts over the next 10 years – and the result is unending deficits.

The White House’s ideological attachment to tax cuts is striking. With this year’s budget, it has now proposed or enacted cuts that, if left in place, would amount to more than double the Social Security deficit over the next 75 years.

Meanwhile, the budget refers to the Social Security deficit as “the real fiscal danger”. The administration claims that, under normal circumstances, the federal budget should be in balance. But at the same time it projects a structural deficit of Dollars 190bn in 2008 and about Dollars 2,000bn over the decade. That indicates a fundamental imbalance between tax and spending that persists long after the economy has reached full employment and war has presumably subsided.