Financial Times Editorial - America's Looming Fiscal Nightmare
Financial Times Editorial - America's Looming Fiscal Nightmare
Copyright The Financial Times Limited 2006
Published: June 29 2006 03:00 | Last updated: June 29 2006 03:00
Whenever a US president wants to signal fiscal resolve, he proposes a budget "line item veto". George W. Bush is no exception, having this week called on the senate to give him such powers. But even assuming it got past the Supreme Court, which in 1998 struck it down as unconstitutional, the measure would have a negligible impact on America's troubling fiscal outlook.
Against a projected deficit of at least $300bn (£165bn) this year on a total US federal budget of almost $2,800bn, the total cost of congressional "pork barrel" items, or earmarks, is unlikely to exceed $50bn. Even if Mr Bush vetoed every single earmark, a strategy that would alienate most of his Republican allies on the Hill, there would only be peanuts to show for it. It seems likelier the White House is resuscitating the veto as a way to appear fiscally responsible to those alienated by Mr Bush's budgetary indiscipline.
On the face of it, that record looks to be gradually improving of its own accord, as Hank Paulson, the new treasury secretary, said in his confirmation hearings this week. According to the administration's estimates, the US deficit is on track to achieve what would appear to be a manageable 2 per cent of gross domestic product by the end of Mr Bush's term. But these improvements stem chiefly from the recent surge in tax revenues after several years of galloping US growth. They amount to a cyclical spike in revenues that flatter only to deceive.
As Mr Paulson knows, the US ought to be in surplus after five years of above-trend GDP growth. That should be normal at this stage of the cycle. But if you add in America's structural problems, then today's deficits are inexcusable. Midway through the first term of Mr Bush's successor, America's social security surplus will switch to deficit as the baby boom generation begins to retire. By recalibrating benefits or raising the retirement age, much of it can be eliminated. In contrast, there is no easy solution for America's mounting Medicare and Medicaid bills over the next generation.
Overall entitlement spending is set to rise from 8.7 per cent of GDP in 2006 to 20 per cent by 2030 - roughly the share taken up by all spending today. To underline the consequences of inaction, Standard and Poor's recently said US treasury bonds would be downgraded to BBB by 2020. Forestalling what would be a disaster for the US and the world should be Mr Bush's priority in the remainder of his term. Establishing a bipartisan commission to look into both entitlement reform and taxes - as moderate Democrats and Republicans have urged - would be a good start. Given Washington's charged atmosphere nowadays, that might be difficult. But the new treasury secretary is respected on all sides. He should use that goodwill to start laying the groundwork for America's long-term fiscal sanity. Against that challenge, Mr Bush's line item veto is pure trivia.
Copyright The Financial Times Limited 2006
Published: June 29 2006 03:00 | Last updated: June 29 2006 03:00
Whenever a US president wants to signal fiscal resolve, he proposes a budget "line item veto". George W. Bush is no exception, having this week called on the senate to give him such powers. But even assuming it got past the Supreme Court, which in 1998 struck it down as unconstitutional, the measure would have a negligible impact on America's troubling fiscal outlook.
Against a projected deficit of at least $300bn (£165bn) this year on a total US federal budget of almost $2,800bn, the total cost of congressional "pork barrel" items, or earmarks, is unlikely to exceed $50bn. Even if Mr Bush vetoed every single earmark, a strategy that would alienate most of his Republican allies on the Hill, there would only be peanuts to show for it. It seems likelier the White House is resuscitating the veto as a way to appear fiscally responsible to those alienated by Mr Bush's budgetary indiscipline.
On the face of it, that record looks to be gradually improving of its own accord, as Hank Paulson, the new treasury secretary, said in his confirmation hearings this week. According to the administration's estimates, the US deficit is on track to achieve what would appear to be a manageable 2 per cent of gross domestic product by the end of Mr Bush's term. But these improvements stem chiefly from the recent surge in tax revenues after several years of galloping US growth. They amount to a cyclical spike in revenues that flatter only to deceive.
As Mr Paulson knows, the US ought to be in surplus after five years of above-trend GDP growth. That should be normal at this stage of the cycle. But if you add in America's structural problems, then today's deficits are inexcusable. Midway through the first term of Mr Bush's successor, America's social security surplus will switch to deficit as the baby boom generation begins to retire. By recalibrating benefits or raising the retirement age, much of it can be eliminated. In contrast, there is no easy solution for America's mounting Medicare and Medicaid bills over the next generation.
Overall entitlement spending is set to rise from 8.7 per cent of GDP in 2006 to 20 per cent by 2030 - roughly the share taken up by all spending today. To underline the consequences of inaction, Standard and Poor's recently said US treasury bonds would be downgraded to BBB by 2020. Forestalling what would be a disaster for the US and the world should be Mr Bush's priority in the remainder of his term. Establishing a bipartisan commission to look into both entitlement reform and taxes - as moderate Democrats and Republicans have urged - would be a good start. Given Washington's charged atmosphere nowadays, that might be difficult. But the new treasury secretary is respected on all sides. He should use that goodwill to start laying the groundwork for America's long-term fiscal sanity. Against that challenge, Mr Bush's line item veto is pure trivia.
posted by Carlos T Mock at 10:59 AM
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