The US Presidential Elections: 'Crazy' budget deficit threatens to break out of the basement

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The Independent Online
RACE RELATIONS used to be the granny-in-the-attic of American politics - always present but rarely mentioned. Now, according to Ross Perot, the US budget deficit and national debt have become the 'crazy aunt we keep down in the basement. All the neighbours know she's there, but nobody wants to talk about her'.

The Texan billionaire says that he re- entered the US presidential race because the other candidates were ignoring the dollars 333bn ( pounds 196bn) annual budget deficit, the most important issue facing the nation.

Informed opinions vary on whether Mr Perot is correct about the deficit's paramount importance. But two things are undeniable: President Bush's first term - perhaps his only term - was undermined by the budget deficit. The deficit will be the most corrosive single problem facing the next president, limiting his ability to tackle other, arguably more important, ills, from the general economy to health care to education to inner-city neglect. The deficit is also important as a metaphor for the political gridlock in Washington and a symbol of the worst political legacy of the Reagan years: the incapacity of the American people to think straight about taxation and government spending.

The annual budget deficit - the difference between what the US federal government spends and what it raises in taxes - now stands at dollars 333bn or dollars 333,000,000,000. The US must borrow dollars 915m a day - or dollars 38m an hour, or dollars 635,000 every minute, or dollars 10,500 a second - to keep the federal government going.

The national debt - the accumulation of 20 years of deficits - now stands at dollars 4tr or, if you prefer, dollars 4,000,000,000,000. Three-quarters of this debt was accumulated in the Reagan-Bush years.

There is nothing wrong in debt in itself. Debt for productive investment is fine. But borrowing to pay for day-to- day living costs is a Micawberish recipe for disaster. Most of the federal debt has been generated by the surge in the cost of Medicare and Medicaid (the health programmes for the elderly and poor), the Savings and Loans bail-out, and in the 1980s, the Reagan defence boom. To keep the deficits within bounds, the government has been spending less and less on truly productive investments such as education and training, public health, roads and bridges, research and development.

How did it happen? Put at its simplest, for the last 12 years, the American people have elected Republican presidents to keep taxes down and Democratic Congresses to keep popular spending up. Neither Congress nor the White House announced a plan to increase the federal deficit: quite the opposite. Several apparently stringent laws were passed to keep deficits down. But, with some brief downward lurches, the deficit kept on growing, both in absolute numbers and in share of GNP.

Why? The budget plans were invariably made with inflated forecasts, known as 'rosy scenarios', of unrealistically high tax revenues and low government spending. The deficit laws applied only to budget plans, not to reality. Whenever the deficits prescribed by the law got too far divorced from reality, the laws were changed.

This is what happened in the 1990 budget agreement. The federal government was closed for several days; spending was cut slightly and taxes were raised marginally, breaking the Bush read-my-lips pledge from 1988. The President's credibility with the Republican right, and many voters, was undermined. The recession was made worse and the deficit grew even bigger. But there was no choice: Mr Bush and Congress were paying the price for years of dishonest budgeting under Ronald Reagan. The failure to restrain the deficit in good times meant that the White House and Congress had no good choices in bad times. Precisely the same choices, or lack of them, face the next president.

Bill Clinton, with the backing of one strand of US economic opinion, says it would be counterproductive to assault the deficit head-on while the economy is so weak. Productive investment in infrastructure and education, and political investment, in middle class tax cuts, must take precedence. Higher taxes on the wealthy and foreign companies, restrained health care costs and cuts in 'wasteful spending' would none the less reduce the deficit to dollars 140bn within four years. The problem is that Mr Clinton's arithemtic is based on the siren song of Washington's paramour, Rosy Scenario: an inflated forecast of the path of the economy.

Mr Bush makes the deficit a nominal priority, promising a ceiling on the growth of the so-called mandatory spending programmes such as Medicare, Medicaid and food stamps. But the President does not explain how these savings would be made. He has already handed away most of their value in promised tax-breaks as he tours the country.

Ross Perot tackles the problem head- on, or seems to. He promises to balance the budget in five years by curbing the entitlement programmes, by raising the top rate of income tax and increasing the tax on petrol by 50 cents a gallon. The Perot programme is refreshingly honest about the choices facing the US. But economically it probably makes no sense to slam on the brakes so hard. And politically the proposed hike in the petrol tax alone looks suicidal.

To critics, Mr Perot says his plan can be delayed until the economy is strong enough to take the medicine. But this is precisely the point: most people agree about what needs to be done; it never seems to be the right time to do it.