A Test of a True Deficit Hawk

March 1, 2010By Janet Bauer

The landmark health reform legislation just signed by President Obama promises salutary benefits, not just for American families but also for our nation’s balance sheet. Over the long term, sharply rising health care costs are the primary cause of growing federal budget deficits. The approved legislation makes progress toward curbing them — by $143 billon over the next 10 years, according to the Congressional Budget Office.

While reining in health care costs is essential, Congress will have to make other policy changes to fix our nation’s finances. One such step is confronting the fiscally damaging legacy of the Bush-era tax cuts.

Most lawmakers profess to worry about the nation’s unsustainable budget trajectory. The expiration of the Bush-era tax cuts this year will provide a timely test to show who among them is a true deficit hawk.

Last year our country spent $1.4 trillion more than it collected in revenues. That amounts to about 10 percent of our current gross domestic product, the largest deficit relative to the economy since World War II.

Much of that large deficit was due to the important federal effort to stimulate the economy — an appropriate response to the biggest economic tumble since the Great Depression. With consumers and businesses on the ropes, only the federal government was in a position to invest in the economy to halt the downward spiral.

If done properly, temporary deficit spending in a recession boosts the economy, making the recession shorter and shallower.

That was the rationale underlying the 2009 federal Recovery Act, which contributed significantly to stabilizing the economy. Thus, the additional debt incurred as part of the Recovery Act has been money well-spent.

As the country emerges from the recession, deficits will decline. But absent significant policy changes, experts predict that deficits will resume their skyward trajectory by 2014.

The Bush-era tax cuts, which disproportionately benefit wealthy households, have been a major driver in the growth of federal deficits. When enacting the tax cuts, the previous administration and its congressional partners never included a way to pay for their Texas-size costs.

Sold as an economic elixir, the deficit-financed tax cuts have actually proven poisonous to our fiscal health. If Congress allows them to live on, the Bush-era tax cuts for the wealthy will contribute more to our long-term fiscal difficulties than either the bank bailout or federal recovery measures or, assuming they are phased out, the wars in Iraq and Afghanistan.

If there is a silver lining to our predicament, it is that Congress scheduled the Bush tax cuts to expire by the end of 2010. Inserted as a ploy to mask the long-term costs of the cuts, the built-in expiration now presents a golden opportunity to begin repairing our nation’s balance sheet.

The Obama Administration has proposed letting those tax cuts that primarily benefit the wealthy expire as scheduled. That’s the fiscally responsible position.

The decision on what to do about the expiring the Bush tax cuts will be a true test of fiscal accountability. Those in Congress who allow the tax cuts for the wealthy to expire will prove to be the real deficit hawks. Those who don’t will have shown they are gone gooses when it comes to taking responsibility for fixing the nation’s finances.

Janet Bauer is a policy analyst with the Oregon Center for Public Policy