News Release

Brookings, Heritage, National Press Foundation Seminar Describes “The Future America Can’t Afford”

October 31, 2005

Federal budget deficits, projected to grow substantially in coming decades as health-care costs soar and tax revenues decline or stagnate, are unsustainable and pose a long-term threat to the U.S. economy and the well-being of future generations of Americans, according to scholars, government officials, and journalists at a seminar today organized by the Brookings Institution, the Heritage Foundation, and the National Press Foundation.

“We are on an imprudent and unsustainable path, and the problem is worse than advertised, with a demographic tidal wave on the horizon,” David Walker, Comptroller-General of the United States, said. “Our hole is getting deeper, but we need to mend our ways and that will require tough choices.” In addition to budget, current-account, and savings deficits, America has a “leadership deficit,” he added. The nation’s unfunded liabilities and commitments for Medicare, Medicaid, Social Security, and other programs have risen from $20 trillion in 2000 to approximately $50 trillion today—equivalent to the entire net worth of all Americans, according to Walker.

Isabel Sawhill, vice president and director of economic studies at the Brookings Institution, and Stuart Butler, vice president of domestic and economic policy at the Heritage Foundation, who have been leading private and public discussions among a wide range of experts of ways to reduce the long-term deficit threat, said that economic dangers threaten American unless decisions are made about entitlement reform, discretionary government spending, and taxation. Like Walker, Sawhill and Butler—as well as health-care scholars Jack Meyer of Brookings, Robert Moffitt of Heritage, and Robert Reischauer, president of the Urban Institute—agreed that soaring health-care costs, rising at 2.5 percentage points faster than GDP growth during the last 30-40 years, are the main reason that deficits are projected to rise sharply after Baby Boomers begin to retire after 2008.

“The big problem is the huge build-up of the three entitlement programs,” Butler said. Without curbing entitlements and spending, taxes would have to rise by about 50 percent. “Something has to give,” he said.

“If a typical household was spending 20% more than it was taking in, year in and year out, as the federal government is doing, it would be in bad shape,” Sawhill said. The only reason that interest rates have not spiked is because of huge levels of U.S. borrowing from foreigners, she added.

Some scholars agreed that both increased tax revenues and spending cuts will be needed. Reischauer said, “fiscal irresponsibility pays political dividends in the short run,” and decried a “myopic” political system. Brian Riedl, a Heritage budget expert, described a “spending spree” since 2001, noting widespread waste and ineffective programs, but agreed that politics make cuts “so difficult.” Joseph Minarik, vice president and director of research for the Committee for Economic Development, noted that the swing from budgetary surplus in 2000 to deficit today has been 6% of GDP, and 80% of that has come from declining revenues, although most future deficit growth will result from health-care and other spending growth.

To rein in deficits, beyond entitlement reform and systemic health-care cost containment, Walker, Riedl, and Minarik called for federal budgeting rules and national indicators of what programs work. Butler suggested that mandatory spending be put on the same basis as discretionary spending. Sawhill noted that Brookings’ two Restoring Fiscal Sanity books offers options for cutting federal spending and increasing revenues. Reischauer called for “rebiasing the budget,” making indexation of taxes and entitlements conditional on the level of budget balance, and for funding programs such as Medicare through slow-growing, dedicated revenues such as a value-added tax.

Without change, Minarik said, “we are handing our grandchildren substantial burdens.”

About Brookings

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