Your Weekly Dose Of "Fiscal Fitness"
Here's my "Fiscal Fitness" column for this week from Roll Call.
Bush Budget Legacy:
Much More Debt,
Far Fewer Options
May 13, 2008
At the same time that the three main reality shows — “American Idol,” “Dancing With the Stars” and the 2008 election — are dominating much of the water cooler talk these days, I’m increasingly haunted by something George W. Bush promised as he was entering the White House: He said he would eliminate the national debt by the end of this decade.
That pledge was made for two reasons. First, federal budget surpluses were recorded from fiscal 1998 to 2001. Even though the surpluses were unexpected and no one was really sure why they happened, the president and almost everyone else assumed that, after four years in a row, they would continue.
There was also a certain amount of awe about the surpluses. The last time the United States had four consecutive budget surpluses was 1927-1930, and after years of having to deal with an annual deficit, no one in power had ever experienced this situation before. The federal budget process, which was largely designed to reduce a deficit, suddenly didn’t seem to be as valuable and there was less interest in complying with it.
Bush talked about the $5.6 trillion surpluses that were projected over the coming decade being so certain that policymakers and analysts were asking what they thought were serious questions about the implications of that happening. They wondered, for example, how the Federal Reserve was going to manage monetary policy without federal securities, and the Congressional Budget Office was asked to analyze the overall situation, including how much of the debt could actually be paid off.
Wall Street also bought into the notion that federal debt would soon be a thing of the past. Traders who bought and sold Treasuries seriously started to wonder how they could make a living if there were no new bills, notes and bonds to buy and sell. Some of the bond traders I know started to talk about new careers. At least partially because of this, the Bond Market Association urged the government to continue to borrow even if it had no deficit to finance so the market could be maintained.
Bush also made the pledge to eliminate the national debt by the end of the decade because that’s what Bill Clinton did as his term was ending. The new Bush administration had to look at least as fiscally conservative as the Democratic White House it was succeeding. There also was so much euphoria about the four consecutive surpluses that getting on that debt elimination train absolutely seemed like the politically correct thing to do.
It clearly hasn’t happened. Instead of being eliminated by the end of the decade, federal debt held by the public is now expected to increase by more than $2 trillion from fiscal 2001 to 2008. By the end of 2009, after Bush leaves office, the debt held by the public will be close to $6 trillion, an 80 percent increase over what it was when he first became president.
There are many reasons the Bush administration didn’t fulfill this pledge. But the bottom line is that it didn’t, and as a result the budget situation facing the next president and Congress will be far worse than it was at the start of the Bush administration.
The biggest problem will be that the federal government will be committed to paying about $200 billion a year in interest on the debt. These are funds that would have been available for anything and everything else had the promise to eliminate the debt stayed a high priority.
Even in an overall federal budget of more than $3 trillion, this will be a significant annual burden. For example, $200 billion is also far more than what’s needed to pay for the one-year fix for the alternative minimum tax that has caused such a heated political battle this year and has been one of the primary reasons the budget process has been delayed. Over the next 10 years, the amount the government is likely to spend on interest is also very close to what will be needed to offset the lost revenue from making the 2001 and 2003 tax cuts permanent and repealing the AMT. Both of these policies are now considered by many to be too expensive, and alternatives are being contemplated.
The amount the government will spend on interest this year will also be more than the amount projected for all activities in Iraq and Afghanistan and about two-thirds of what will be collected from the corporate income tax. It will also be close to half of the projected 2008 deficit.
It’s too late to do anything about this. The deficits have occurred, the debt has increased, and the interest expense is baked in to the federal budget pie. Failing to reduce the national debt as promised means that, long after the Bush administration is over, it will be causing even higher annual federal deficits, national debt and interest payments than would not have otherwise occurred. It will also limit other policy choices from being considered.
That means one of the biggest Bush legacies will be that the federal budget debate will be more difficult in the years ahead than it was while he was president. A second legacy will be that bond traders won’t have to worry about changing careers anytime soon.