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CBPP: Tax, Spending Policy Key To Long-Term Budget Fix January 29, 2007

Posted by notapundit in US News.
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WASHINGTON (Dow Jones)–Tax and spending policy are both key to resolving the U.S. government’s long-term fiscal problems, a leading liberal think tank concludes in a report released Monday.

Allowing the tax cuts enacted in President George W. Bush’s first term to expire would close about 60% of the nation’s budget gap through 2050, but that would still leave the nation with unsustainable annual deficits, according to the Center on Budget and Policy Priorities.

“The problem we face is too large to be solved by raising taxes,” said Jim Horney, CBPP’s director of federal fiscal policy. “Both sides of the budget will have to be on the table when serious conversations about long-term deficit reduction begin.”

The concession is a major one for a liberal group.

Some liberals in Washington maintain that new revenue can offset projected growth in the nation’s entitlement programs and that in some cases, such as for Social Security, no changes need to be made at all.

Bush and many Republicans are just as one-sided in their insistence that tax increases aren’t necessary to fund the U.S. government’s obligations in the future.

They also say that while the cost of Bush’s tax cuts will approach $400 billion a year by 2012, the nation can afford to make them permanent after they expire in 2010.

The report is part of the growing consensus among budget hawks that lawmakers must be willing to consider policy proposals on both sides of the budget ledger to tackle the government’s sizable fiscal problems. Those groups include CBPP, the Concord Coalition, the Center for a Responsible Federal Budget, and Centrists.Org.

The U.S. ran a $248 billion budget deficit in fiscal year 2006 and could run a $210 billion deficit in fiscal 2007, according to recent analyses by the Congressional Budget Office.

But under current fiscal policies, and particularly if Bush’s tax cuts are extended, “the fiscal situation is expected to deteriorate markedly,” the CBPP report concludes.

Rising health care costs, primarily through Medicare and Medicaid, will quickly push the federal deficit to unsustainable levels.

The present value of Social Security’s liabilities over the next 75 years is projected by the Social Security Administration to be $4.6 trillion. Medicare’s liabilities over the same time period, including the cost of the prescription drug benefit added in 2003, have an estimated present value of $31 trillion, SSA says.

By 2050, annual deficits will reach about 20% of the gross domestic product and the national debt will have climbed to 231% of GDP. By that time, paying interest on the debt will consume roughly half of all federal revenue.

“Debt-to-GDP ratios in this range are unprecedented in the United States, even during major wars,” according to the report.

By comparison, the U.S.’ gross federal debt from World War II reached a peak of 121% of GDP.

The group also warned against trying to fix federal spending policies by simply squeezing Medicare and Medicaid.

“Trying to slow public-sector health care cost growth appreciably without addressing private-sector health care cost growth would require draconian cuts in Medicare and Medicaid that would have severe effects on the poor, the elderly, and those with serious disabilities,” the report found.

Such a solution could also unintentionally drive up private-sector costs, by forcing health care providers to give greater amounts of uncompensated care, the report found.

By John Godfrey, Dow Jones Newswires

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