Projected $400 billion deficit blamed on health care costs

April 08, 1992|By Gilbert A. Lewthwaite | Gilbert A. Lewthwaite,Washington Bureau

WASHINGTON — A graph in yesterday's Sun showing the path of recent and projected federal budget deficits was wrongly described as representing the deficit in hundreds of billions of dollars. The graph actually traced the deficit as a percentage of actual and potential gross domestic product.

The Sun regrets the error.

WASHINGTON -- The budget deficit will be back above $400 billion by the start of the next century, mainly because health care costs are expected to rise faster than economic growth, a congressional panel was told yesterday.

"The budget outlook is grim, and there is no relief in sight," said Robert Reischauer, director of the Congressional Budget Office, testimony before the House subcommittee on economic stabilization.

His projection of a $423 billion deficit in 2002 would reverse the deficit declines currently anticipated by both the administration and Congress from next year through 1997. It would leave the next generation facing a crippling burden of debt, along with the prospect of supporting an increasingly dependent population as the post-World War II baby boomers reached retirement.

"What we have to do is look forward and convince the American people that it is in their long-term interest to gradually solve this problem," Mr. Reischauer said. "It is in their interest because their children's standard of living will not be as good as it might be. We, as adults, are in a sense passing on a hot potato to our kids, a burden on to them, without giving them the wherewithal to deal with the problem."

The country has been living on borrowed money and should be "embarrassed" at draining investment resources from the rest of the world, he said. "We are the richest country in the world, and what we are doing is draining resources that might go to the development of the lesser developed countries and using it not for investment . . . but rather to consume more, to consume more than our underlying economy is capable of allowing us to do."

An official in the Bush administration's Office of Management and Budget, which has projected the deficit shrinking from $399 billion in fiscal 1992 to $181 billion in fiscal 1997, refused to comment on Mr. Reischauer's analysis.

But other economists shared his assessment that a fundamental cause of the resurgent deficit was that health costs, without reform, would outstrip economic growth.

Mr. Reischauer's bleak analysis was endorsed by two former CBO directors, Alice Rivlin and Rudolph Penner, who also testified.

Ms. Rivlin, a senior fellow with the Brookings Institution, said the high deficits of the 1980s did not cause the recession but certainly made it worse. She lamented the lack of attention to deficit reduction in the presidential campaign.

"Nobody's talking about what I think is the biggest single issue facing the next Congress and the next president, and that is how to get the budget deficit down and get the budget into surplus," she said.

She counseled Congress against acting to reduce the deficit before economic recovery was established, and warned against trying to stimulate the economy with tax cuts that would only make the long-term situation worse. The eventual priority should be to increase savings and investment, she said.

Over the long run, the government should plan to move toward budget surplus, earmarking 4 percent of gross domestic product for deficit reduction, she said. Halving the growth of health costs could save more than 2 percent of gross domestic product by the end of the decade, producing more in savings than the peace dividend.

There would have to be either drastic spending cuts or "a massive" tax increase, she said.

The necessary spending cuts could not be achieved by "squeezing down," but would present a fundamental question of what the federal government's future role should be: Should the federal government hand over to the states responsibility for education, entitlement programs and infrastructure development?

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