- - Wednesday, June 20, 2012


Given his novel economic analyses, President Obama might soon declare the federal budget, too, “is doing fine.”

But of course, the government’s fiscal health is even weaker than job growth in the not-so-fine private sector. Washington’s uncontrolled spending feeds a cancer of deficits and debt that will eventually overwhelm the economy. Policymakers must act swiftly and decisively to correct this condition - or doom the country to the rueful consequences.

The Congressional Budget Office recently projected that current policies, if left largely unchanged, would drive federal spending to a peacetime record 24.3 percent of gross domestic product (GDP) in a decade and to more than 35 percent of GDP by 2037.

CBO also noted that, absent significant reform, spending would increasingly outrun tax revenues. As a result, publicly held debt swells to nearly twice the size of the entire economy by 2037. This massive debt would stunt economic growth, leaving real (inflation-adjusted) gross national product about 4.5 percent smaller in 2027 and a staggering 13.5 percent less in 2037. The trend also increases the chance of a fiscal crisis, “during which investors would lose confidence in the government’s ability to manage its budget, and the government would thereby lose its ability to borrow at affordable rates,” CBO says.

The main culprits are Social Security and federal health care spending including Medicare, Medicaid and ObamaCare. By midcentury, these programs will soak up about 18.5 percent of GDP nearly equivalent to the total average annual budget over the past 50 years crowding out all other government activities.

The pattern is clearly untenable, and the longer Congress delays, the more wrenching will be the policy changes needed to fix it. Congress must begin taking steps now, not later, and be prepared to follow through in coming years. Here are four key steps:

Get back to budgeting:Congress hasn’t passed a regular budget in three years. Lawmakers have resorted to ad hoc funding maneuvers, and spend-as-you-go legislating creates greater instability for current and future budgeting. The first step in gaining control of spending is to pass regular congressional budgets, as required by law.

Say no to any tax increases: Next year, roughly $500 billion in tax increases are slated to take effect automatically. This “Taxmageddon” would be ruinous for a weak economy. But President Obama insists on boosting the top two income-tax rates before approving any legislation to head off the other tax increases. This has produced a legislative standoff. To break it, the president and his congressional allies should agree to extend all existing tax policies long enough for Congress to develop a thorough and much-needed reform of the needlessly complex tax code.

Replace the ‘sequester’: Congress should also move quickly to head off the defense-crippling January spending cuts called “sequestration” a product of last year’s debt-ceiling agreement which already threaten military readiness. The House has adopted an imperfect but reasonable plan to replace the sequester for fiscal year 2013. The president and the Senate should promptly offer their own proposals and move toward an agreement well before the sequester hits. This should not wait for a desperate, lame-duck session at the end of the year.

Lay the groundwork for long-term reform: By addressing these near-term challenges, Congress can position itself for correcting the government’s unsustainable long-term fiscal course. This will require, among other things, fundamentally restructuring the major entitlements so they can keep their promises to 80 million retirees without smothering the economic growth needed to sustain the country.

Such reforms can be found in the Heritage Foundation proposal “Saving the American Dream,” which contains a range of entitlement and tax reforms that achieve a balanced budget in 10 years and ensure long-term prosperity.

In any event, Congress must act soon, and remain committed to spending control. The alternative is to abandon, for future generations, the opportunity and prosperity America has always provided.

Patrick Louis Knudsen is the Grover M. Hermann senior fellow in federal budgetary affairs at the Heritage Foundation (www.heritage.org)

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