Budget analysts warned that last week’s deal to avoid the fiscal cliff did nothing to address the nation’s long-term debt crisis.
A new report by the Committee for a Responsible Federal Budget concludes that the federal government will add an additional $8 trillion to the nation’s publicly held debt during the next decade. Moody’s Investors Service warned that the U.S. faced a possible downgrade in its credit rating unless President Barack Obama and lawmakers make serious efforts to reduce the deficit.
“Anybody who is fair minded would have to say they kicked the can down the road,’’ said former Sen. George V. Voinovich, R-Ohio. “Somebody has got to put together a plan and if the president had any hair on his chest he would provide the leadership to put together a fair plan.’’
A partisan showdown is expected by the end of February when Congress has to approve an increase in the federal government’s debt ceiling and pass a temporary spending measure to keep the government open. Republicans are vowing not to extend the debt limit without the White House consenting to budget reductions while Obama warned he will not negotiate with Congress on the debt limit.
Without congressional approval to increase the government’s $16.4 trillion debt limit, the administration will not be able to borrow money to pay its bills, raising the possibility of the government defaulting on its debt. Such an outcome could deal a blow to the fragile economy.
Last week’s compromise package did not tamper with the three entitlement programs driving the federal deficit – Social Security, Medicare, which provides health coverage for the elderly, and Medicaid, which pays health costs for low-income people.
In 2011, the government spent $1.6 trillion on those three programs, a number that will rise to $3 trillion by 2022. By 2025, Medicare, Social Security, Medicaid and interest on the national debt will consume every tax dollar collected by the federal government, forcing the government to pay for national defense, education, housing, and criminal justice with borrowed dollars.
But the president infuriated Republicans by insisting he would “not have another debate with this Congress over whether or not they should pay the bills that they’ve already racked up through the laws that they passed.’’ Obama’s demand prompted Tiberi to snap that “for the president to say he was not going to negotiate with us over raising the debt ceiling – wow. It’s just beyond understanding.’’
Analysts have downplayed Obama’s threat. Peter Orszag, who served as Obama’s first budget director, told CNBC last week that “you can say you’re not negotiating over the debt limit, but there will be negotiations in February and March.’’
Larry Sabato, a professor of political science at the University of Virginia, agreed, saying “Mr. President, you’re going to have to negotiate,’’ adding that Republicans “have no incentive to give it to you. You’re going to have to do something about entitlements and government spending.’’
Analysts believe that the Republicans will be in a stronger bargaining position than they were during the fiscal cliff. Obama made it clear that congressional Republicans would be held responsible by voters if they held up extending the 2001 tax cuts for most Americans because they favored making permanent all the tax cuts for the wealthy as well.
By contrast, not only does the debt ceiling expire at the end of February, but the first of $1.2 trillion in automatic spending reductions are scheduled to go into effect on March 1. Those reductions will have no impact on Social Security, Medicare and Medicaid, but instead are limited to what is known as discretionary spending – money that Congress must approve every year for programs such as defense.
“The only leverage we have is on the discretionary side,’’ Tiberi said. He said GOP lawmakers “can use’’ the threat of automatic spending cuts to force Obama and Senate Majority Leader Harry Reid, D-Nev., to negotiate spending restraints in Medicare and Medicaid.
“The facts are you can’t raise taxes enough on people to pay for the growth of entitlements,’’ said Tiberi, a close ally of House Speaker John Boehner, R-West Chester Twp. “You have to change the entitlements,’’ adding that “we can just keep delaying the inevitable.’’
Edward “Ned” Hill, dean of the Levin College of Urban Affairs at Cleveland State University, acknowledged that the Republican-controlled House will not approve new taxes any time soon, but “if we do all this stuff through spending cuts, we will trigger if not a recession, then we will at least assure that GDP growth will be around 2 percent, which is not healthy.’’
Hill said neither liberal Democrats who oppose any changes in Social Security, Medicare and Medicaid nor conservative Republicans who demand only spending reductions have the right approach, saying “if you try to do it with the silver bullets the ideologues on the edges of the debate are firing at each other, it’s not good economics. We need a radical pragmatist.”
The budget problems could become even bleaker if U.S. debt is downgraded or long-term interest rates rise from their current low levels. Higher interest rates would force the government to set aside hundreds of billions of extra dollars simply to pay interest on the debt.
“I worry at some point that these super low interest rates will not be allowed to persist,’’ said Ken Mayland, the head of Clearview Economics, an economic forecasting firm in Cleveland.
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