U.S. deficit target in sight, so are traps

Entitlement issues still loom; economy could stumble again

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WASHINGTON -- The latest budget impasse ushered in a new round of austerity Saturday, with the nation facing reduced federal services, canceled contracts, job furloughs and layoffs.

But lost in the talk of Washington's dysfunction is this fact: On paper at least, President Barack Obama and Congress have reduced projected deficits by nearly $4 trillion over a decade -- the widely embraced goal for stabilizing the national debt.

The spending cuts that began to take effect Friday, known as sequestration and totaling about $1 trillion through 2023, come on top of $1.5 trillion in reductions that Mr. Obama and Congress committed to in 2011, mainly from the accord that averted the nation's first debt default.

Nearly $700 billion more will come from tax increases on wealthy Americans, the product of the brawl in December over Bush-era tax cuts, and another $700 billion is expected to be saved in projected interest on the reduced debt.

If the latest cuts stick, the two parties will have achieved nearly the full amount of deficit reduction over the next decade that economists and market analysts have promoted. Yet the mix comes with substantial downsides.

It does not add up to the "grand bargain" that the two parties had been seeking, because it leaves virtually untouched the entitlement programs -- Medicare, Medicaid and Social Security -- that are responsible for projections of an unsustainably rising federal debt in coming decades.

"This is not a result that deals with our long-term debt problem," said Vin Weber, a Republican former congressman. "The fact we've gotten to a $4 trillion deficit-reduction deal without tackling entitlements is almost a bad thing," he added, if it lulls the public and the politicians into thinking the problem is solved.

The progress on deficit reduction over the past two years also could hamper job creation and the economic recovery. Private and government forecasters project that sequestration alone will cost about 700,000 jobs this year and will shave at least a half percentage point from economic growth. The Congressional Budget Office now forecasts a falling deficit but stubbornly high unemployment in coming years.

For Democrats, at least, the mix of spending cuts and tax increases in the package is another reason for disappointment. The deficit deals to date would yield $4 in spending cuts for every dollar of new revenue. Mr. Obama, as well as several bipartisan groups, including the commission led by Erskine Bowles and Alan Simpson, calls for $1 of tax increases for every $2 to $3 in spending cuts.

It remains unclear how long sequestration will last: it was designed to be onerous to force a compromise on an alternative. But Mr. Obama and Republicans indicated Friday that the cuts would probably remain in place at least until the end of the fiscal year, Sept. 30.

Democrats, led by the president, express confidence that in coming months public pressure will force Republicans to relent on revenue, especially as cuts to the military begin to be felt. But Republican leaders have said they will stand firm against tax increases, suggesting that they have won at least a temporary victory on reducing the size of the government.

In his weekly address on Saturday, Mr. Obama said the Republicans had "decided that protecting special interest tax breaks for the well off and well connected is more important than protecting our military and middle-class families from these cuts."

"I still believe we can and must replace these cuts with a balanced approach -- one that combines smart spending cuts with entitlement reform and changes to our tax code that make it more fair for families and businesses without raising anyone's tax rates," Mr. Obama said.

In the Republican response, Rep. Cathy McMorris Rodgers of Washington state, said: "The problem here isn't a lack of taxes. This year alone, the federal government will take in more revenue than ever before. Spending is the problem, which means cutting spending is the solution. It's that simple."

According to the nonpartisan Congressional Budget Office, total government spending is falling compared with the size of the economy but will rise again in the next decade. That growth will be driven by the entitlement programs as more baby boomers retire, not by discretionary spending.

And revenues, while reaching a high in dollar terms, remain below the average of the past 40 years as measured against gross domestic product.

The grand bargain that has eluded Mr. Obama and House Speaker John Boehner was supposed to mainly curb entitlement spending and raise revenues. Lesser savings would come from the discretionary programs that cover almost everything else the government does for defense and domestic purposes.

But Mr. Boehner's speakership is on the line, given Republicans' unhappiness with the December tax deal, and he vows that he will no longer negotiate with Mr. Obama on overhauling the tax code to raise revenue for deficit reduction. To date the revenue raised falls short of the amount Mr. Boehner proposed in previous talks. Nor will the Senate Republican leader, Mitch McConnell of Kentucky, who faces re-election next year in a state with a strong Tea Party faction. He said Friday, "I will not be part of any back-room deal and I will absolutely not agree to increase taxes."

The president and congressional Democrats will not agree to reductions in Medicare or Social Security spending except in return for at least $600 billion more in higher revenue over 10 years, from shaving tax breaks for the wealthy and corporations.

That standoff has left the discretionary programs to bear the brunt of deficit reduction measures. Those domestic and military programs are so named because Congress has discretion to set spending levels annually in appropriations bills; entitlement benefits, in contrast, grow automatically unless changed by law.

J. Keith Kennedy, a Republican former staff director of the Senate Appropriations Committee, said: "The annual discretionary money is where you make your investments. And you decide every year where do you want to put your money to invest in the future -- whether it's education, or health care or infrastructure or national parks or sending another rover to Mars."

For two decades through the 1990s, G. William Hoagland, then the Republican staff director at the Senate Budget Committee, fought with Mr. Kennedy to get the Appropriations Committee to cut discretionary spending. But now, Mr. Hoagland said, "We have squeezed that turnip as far as we're going to go, and that's before sequestration. That is the component of the budget which, for all practical purposes, is the seed corn of the future."

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