Discuss as:

Good economic news may delay fiscal fix

The fiscal news in recent days has been good – last Friday the Medicare trustees pushed back by two years the insolvency date for the program’s hospital insurance fund. And there’s been a robust increase in federal tax revenues in the past 12 months.

But some fiscal policy experts fear that the news may be so good that it is undermining a sense of urgency in Congress on finding a long-term balance between outlays and revenue, , setting up a potential scenario where big decisions about fixing entitlement programs get even harder for politicians and more controversial for Americans.

One of the Medicare and Social Security public trustees, Charles Blahous, warned at a panel discussion in Washington Tuesday, “By any measure we are now very, very late in the game when it comes to dealing with the Social Security shortfall. And in my view we do not have the requisite sense of urgency that we should — given how serious things have become.”

The trustees reported Friday that the combined Social Security trust funds will exhaust their assets in 2033, but that the disability fund will be depleted in only three years, by 2016.

Blahous and others warn that the longer Congress waits to fix the long-term mismatch between future revenues and the benefits that have been promised to retirees, the disabled, and the elderly, the more excruciating the decisions to cut benefits and raise taxes will be.

The painful 1983 Social Security reforms — which included delaying cost-of-living increases, raising the retirement age, and other measures — were only “a little bit more than half as severe as what we’d have to do today if we want to balance Social Security for the next 75 years, Blahous said. 

"We’re basically in uncharted waters at this point. We don’t know whether our political system can forge an agreement to close a shortfall that is as large as Social Security’s has already become,” he added.

For now, Senate Democrats are focused on their attempt to convene a conference committee with House members on the budget resolution for Fiscal Year 2014.

That conference, if it ever occurs, might lead to an accord to raise the government’s borrowing limit before it is reached in late summer or early fall. It might also lead to a deal on taxes and entitlements. And under what are called budget reconcilation rules, measures can pass in the Senate wih a simple majority and cannot be filibustered.

With no sense of impeding fiscal crisis, Republicans seem in no hurry to agree to that conference.

For weeks, conservatives such as Sen. Ted Cruz, R-Texas and Sen. Marco Rubio, R-Fla., have objected to Democratic motions to convene a budget conference committee.

J. Scott Applewhite / AP

Sen. Ted Cruz, R-Texas, conducts a TV news interview on Capitol Hill in Washington, Monday, May 6, 2013.

“All of us have said the same thing: take the debt ceiling off the table and we’ll go to conference,” Cruz told reporters before the Senate broke for its week recess. “This is a fight over whether the United States raises the debt ceiling trillions of dollars with no (spending) reforms whatsoever.”

In the short run there are reasons for optimism about the economy and the government’s finances.

Income tax and payroll tax revenues are up 16 percent so far this fiscal year compared to last year. The Congressional Budget Office reported last month that the deficit this year — at 4 percent of gross domestic product (GDP) — will be less than half as large as the shortfall in 2009, which was more than 10 percent of GDP.

“The good news is that in existing circumstances the deficit will be reduced over a ten-year period somewhere between $3.6 and $3.8 trillion,” Sen. Bill Nelson, D-Fla., noted Tuesday at a Senate Budget Committee hearing. “The bad news is … that we’re going to have a crisis again come this fall, just like we had in 2011 over the raising of the debt ceiling."

Referring to the unresolved questions about tax reform, entitlement reform, this year’s budget and the annual spending bills, as well as the debt limit, Nelson said, “Everything is going to come crashing in, in my opinion, this fall whenever we reach that limit on the debt ceiling.”

The star witness at the hearing, former Treasury Secretary and economist Lawrence Summers, offered some economic bullishness: “I am as optimistic — probably more optimistic — about the future for the U.S. economy than I have been at any time in the last 15 years…. There is a real prospect of accelerated growth as we move to the end of this year and to 2014 and 2015.”

And yet Summers delivered a mixed message, warning about the still high unemployment rate, zero interest rates which can’t be cut further, and a weak global economy.

Referring to the spending reductions, or sequester, in the 2011 Budget Control Act, Summers said that spending cuts which reduce consumer demand would hurt economic growth and “may even be counterproductive in terms of reducing (federal) debt burdens -- because slower economic growth leads both to larger deficits and to a lower level of GDP, and therefore a higher debt-to-GDP ratio. This is not the time for austerity or further cutbacks.”

The sequester mostly exempts entitlement spending — the larger part of the federal budget — so its full force falls on discretionary outlays, the smaller part of the budget. Not only are defense outlays cut, but also investments that may lead to future growth and innovation — such as federal grants to biologists, geneticists, and other researchers.

Summers’ testimony aligned with the Democratic message that Congress must replace the sequester with a mix of tax increases and other spending cuts and must unleash a new round of stimulus spending.

Senate Budget Committee Chairman Sen. Patty Murray, D- Wash., said the point of her panel's hearing had been to raise the question of “are we impacting our long-term growth by putting all of our cuts on discretionary spending? That’s a huge difference between the House and the Senate that’s very real.”

Despite the news from the Medicare trustees on insolvency pushed back to 2026, Murray said, “the long-term questions remain on both taxes and on entitlements. And we have to have that discussion, but we can’t do any of it until we get to conference.”

She added that Democrats have “a concern that the Republicans are going to drag us into a debate over the debt ceiling that will hurt our very fragile economy.”

This story was originally published on