April 2007 SGE Monthly Luncheon
“Can We Really Eliminate Our Budget Deficits?”
Review of Remarks by Diane Lim Rogers*
Chief Economist of the House Budget Committee
Rapporteur: Michael Wolf
At the April SGE luncheon, Diane Lim Rogers spoke about the causes of the present budget situation as well as possible future steps that may be taken to address the problem of budget deficits. She began with an overview of her professional experience and how it shaped her views on fiscal discipline. Working at the Congressional Budget Office during the 1990’s, she saw how balancing budgets and running a surplus increased national savings, as well as how the tax increases of 1993 did not hurt the economy as many predicted. This experience led her to oppose the tax cuts proposed by President Bush in 2001 because of how it would affect the fiscal outlook.
Rogers detailed the changes in the long term budget outlook since 2001. In that year, the Congressional Budget Office’s ten year baseline budget projections called for a $5.6 trillion surplus—current projections estimate that there will actually be a $3 trillion deficit over the same time period. The deterioration in the budget situation came from four main sources: the tax cuts of 2001-2003; discretionary spending growth, including, but not limited to, appropriations for the war; growth in entitlement spending; and economic factors, particularly the last recession.
The tax cuts have reduced revenues by $2 trillion since they were enacted, and if they were to be made permanent, as called for by the president’s FY2008 budget, the cost over the next ten years will be a further $1.8 trillion. If tax revenues are reduced even more by a reform of the alternative minimum tax (AMT), a priority for both parties, the cost of tax cuts over the next ten years jumps to $3.5 trillion. This makes the total cost of tax cuts, from 2001 to 2017, $7 trillion.
At the time they were proposed, supporters of the tax cuts of 2001-2003 argued that they would not hurt the long term budget outlook for two reasons. First, tax cuts would grow the economy, and thus increase revenues. Although the economy has recovered, revenues have not reached the level that they would be without the tax cuts. Second, tax cuts would restrain spending by starving the beast. However, congress did little to restrain spending growth despite reduced revenues.
Public opinion on tax cuts has been warped by rhetoric. People view tax cuts as free when they are not paired with spending reductions or other offsets. The costs of these deficit-financed tax cuts are usually felt through higher interest rates, but due to a large foreign appetite for U.S. debt, interest rates did not rise when budget deficits increased. 75% of the increase in debt since 2001 has been financed by foreigners. If this demand dries up, rates will have to rise.
The other cost to deficit-financed tax cuts is to intergenerational equity. The current generation is essentially borrowing money and leaving their children to pay the bill. Because this cost is not felt by people in their day to day lives, they often are not aware of it. Educating the public on this issue is the goal of the Concord Coalition’s Fiscal Wake-Up Tour, a bipartisan campaign in which Rogers participated.
In the short term, efforts need to be made to stop the bleeding. Imposing and following pay-go rules for new tax cuts is a start. Major tax reform will likely wait until the next president, whom Rogers predicts will be more fiscally responsible. Since the tax cuts are not set to expire until 2010, there will be time to address them then. AMT tax reform will probably consist of a one or two year fix, and then will also be dealt with when there is a new President. AMT reform may be difficult to be made revenue neutral due to opposition in the Senate.
In the longer term, entitlement spending is the biggest challenge affecting the budget outlook. Boosting revenues will not be able to solve this problem entirely, but it cannot hurt, and at a minimum, the problem should not be made worse by adding more tax cuts not coupled with offsets. If Congress is unable to abide by pay-go rules, it will raise serious questions about how it can cope with the much bigger issue of entitlement reform.
* The views expressed are those of the presenter’s alone and should be interpreted as the official views of the House Budget Committee nor any of its Members.