The Real Fiscal Danger

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

April 21, 2003

The Administration’s budget includes a chapter entitled “The Real Fiscal
Danger,” which highlights the projected imbalances in Social Security and Medicare.
Ironically, the budget does not include any specific steps to eliminate or even reduce
those imbalances. It does, however, propose substantial tax cuts that exacerbate the longterm
budget deficits it so vividly displays. Especially since the tax cuts divert revenue
that could have instead been used to grease the wheels of Social Security or Medicare
reforms, the Administration’s attitude that tax cuts are the solution to every social and
economic problem is itself a significant contributor to the real fiscal danger.

The Administration’s dogmatic stance on long-term tax cuts regardless of
circumstances is at odds with history. Over the past 20 years, when projections of budget
deficits grew significantly, policy makers often responded in a fiscally responsible
manner, legislating combinations of tax increases, spending cuts, and stringent budget
rules. In 2001, official projections of ever-growing surpluses generated bipartisan
support for tax cuts. Currently, however, despite projections of increasing and substantial
short- and long-term budget deficits, the Bush Administration has proposed tax cuts that
are large, permanent, and regressive. In economic terms, this strategy represents a
substantial fiscal gamble.

A key question is the likelihood that this policy would succeed if it were
implemented. For current purposes, we define success to mean that the policy at least (a)
restores economic growth; (b) does not increase burdens placed on future generations;
and (c) is at worst distributionally neutral. President Bush has enunciated similar goals.
In the 2003 State of the Union address, the President said that “Lower taxes and greater
investment will help this economy expand? The best way to address the deficit and move
toward a balanced budget is to encourage economic growth.” He also emphasized that
“…we will not pass along our problems to other Congresses, to other presidents, and other
generations.” In 1999, as a Presidential candidate, then-Governor Bush criticized
Congressional Republicans for attempting to “balance their budget on the backs of the
poor.” The combination of these statements suggests that by the President’s own
standards, the Administration’s budget strategy would be a success only if it generated significant economic growth and significant spending restraint, and the effects on lowerand
middle-income households were neutral at worst.

This is the second in a series of columns that addresses this budget strategy. In
Gale and Orszag (2003), we provide estimates of the budget outlook under the
Adminstration’s proposals. Future columns will address the effects of the tax cuts on
growth, spending levels, and distributional issues. In this column, we provide
perspectives on the magnitude of the proposed tax cuts and the severity of the underlying
budget situation.