Please wait...How it happened FROM SURPLUS TO HUGE DEBT
By Lori Montgomery Washington Post
WASHINGTON – The nation’s unnerving descent into debt began a decade ago with a choice, not a crisis. In January 2001, with the budget balanced and clear sailing ahead, the Congressional Budget Office forecast ever-larger annual surpluses for the foreseeable future. The outlook was so rosy, the CBO said, that Washington would have enough money by the end of the decade to pay off everything it owed.
Voices of caution were swept aside in the rush to take advantage of the apparent bounty. Political leaders chose to cut taxes, jack up spending and, for the first time in U.S. history, wage two wars solely with borrowed funds. “In the end, the floodgates opened,” said former Sen. Pete Domenici, R-N.M., who chaired the Senate Budget Committee when the first tax bill hit Capitol Hill in early 2001. Now, instead of tending a nest egg of more than $2 trillion, the federal government expects to owe more than $10 trillion to outside investors by the end of this year – and an additional $4 trillion to federal programs such as the Social Security trust fund. The national debt is larger, as a percentage of the economy, than at any time in U.S. history except for the period shortly after World War II. Polls show a large majority of Americans blame wasteful or unnecessary federal programs for the nation’s budget problems. But routine increases in defense and domestic spending account for only about 15 percent of the financial deterioration, according to a new analysis of CBO data.
The biggest culprit, by far, has been an erosion of tax revenue triggered largely by two recessions and multiple rounds of tax cuts. Together, the economy and the tax bills enacted under former President George W. Bush, and to a lesser extent by President Barack Obama, wiped out $6.3 trillion in anticipated revenue. That’s nearly half of the $12.7 trillion swing from projected surpluses to real debt. Federal tax collections now stand at their lowest level as a percentage of the economy in 60 years. Big-ticket spending initiated by the Bush administration accounts for an additional 12 percent of the shift. The Iraq and Afghanistan wars have added $1.3 trillion in new borrowing. A new prescription drug benefit for Medicare recipients contributed $272 billion more. The Troubled Assets Relief Program bank bailout, which infuriated voters and led to the defeat of several legislators in 2010, added just $16 billion – and TARP may eventually cost nothing as financial institutions repay the Treasury.
Obama’s 2009 economic stimulus, a favorite target of Republicans who blame Democrats for the mounting debt, has added $719 billion – 6 percent of the total shift, according to the new analysis of CBO data by the nonprofit Pew Fiscal Analysis Initiative. All told, Obama-era choices account for about $1.7 trillion in new debt, according to a separate Washington Post analysis of CBO data over the past decade. Bush-era policies, meanwhile, account for more than $7 trillion and are a major contributor to the trillion-dollar annual budget deficits that are dominating the political debate. As Congress prepares this week to launch a high-stakes battle over whether to raise the legal limit on borrowing, the analyses offer a clearer view of the drivers of the debt – and of the difficulty of re-balancing the budget without new tax revenue.
Most Republicans reject raising taxes as part of the solution; House Speaker John Boehner of Ohio has called it a “non-starter.” But Democrats won’t go for a proposal based solely on spending cuts. The annual surpluses that set the nation on this course emerged in the final years of the Clinton administration. What to do with the surplus became a central issue of the 2000 presidential campaign, with Vice President Al Gore arguing that much of it should be put in a “lockbox” to protect Social Security and Medicare. Bush pushed for a broad tax cut.
As soon as he took office, Bush pushed Congress to make good on his tax pledge. He got a boost from Federal Reserve Chairman Alan Greenspan, who testified before the Senate Budget Committee that “tax reduction appears required” to prevent the federal government from accumulating too much cash. A chorus of skeptics warned against spending the surplus. Still, Congress approved a $1.35 trillion tax cut in record time. A second package, worth $350 billion, followed in 2003. Together, they constituted one of the largest tax cuts since World War II, according to the conservative Tax Foundation.
Bush’s first Treasury secretary, Paul O’Neill, resigned after the White House decided to pursue the 2003 measure. “I believed we needed the money to facilitate fundamental tax reform and begin working on unfunded liabilities for Social Security and Medicare,” O’Neill said in an interview. But the White House, he said, “wanted to make sure economic conditions were great going into the president’s re-election.”
Proponents of tax cuts argue that the legislation merely returned tax collections to their appropriate levels. They note that the CBO’s 2001 forecast assumed that tax collections would stay above 20 percent of the nation’s gross domestic product – well above the historic average of around 18 percent of GDP. But some key advocates of the tax cuts now say such a large reduction in taxes was probably ill-advised.
“Nobody would have thought that all these things would have happened after you cut taxes,” Domenici said. “That you’d have two wars and not pay for them. That you’d have another recession. A huge extravaganza of expenditures” for the military and homeland security after the Sept. 11, 2001, attacks. “You would pause before you did it, if you knew.” In the end, Bush cut taxes and spent more money. Good times masked the impact. But after the economy collapsed during Bush’s final year in office, deficits – and therefore the debt – began to explode as Obama sought to revive economic activity with more tax cuts and federal spending.
Today, the CBO forecasts are unrelievedly gloomy, showing huge deficits essentially forever. As policymakers grapple with the legacy of the past decade, a wave of senior citizens is crashing at their doorstep, driving up the cost of Medicare, Medicaid and Social Security.
William Hoagland, who was for years a top budget aide to Domenici and other GOP Senate leaders, said it is simplistic to think today’s fiscal problems began just 10 years ago. Still, Hoagland said, the abandonment of fiscal discipline in the wake of the surpluses clearly didn’t help. “Nobody pushed for paying for this stuff,” he said. Not even after “it became very clear in the middle of 2003 that the line had turned on us. And the surpluses as far as the eye could see were no longer there.”
WASHINGTON – The nation’s unnerving descent into debt began a decade ago with a choice, not a crisis. In January 2001, with the budget balanced and clear sailing ahead, the Congressional Budget Office forecast ever-larger annual surpluses for the foreseeable future. The outlook was so rosy, the CBO said, that Washington would have enough money by the end of the decade to pay off everything it owed.
Voices of caution were swept aside in the rush to take advantage of the apparent bounty. Political leaders chose to cut taxes, jack up spending and, for the first time in U.S. history, wage two wars solely with borrowed funds. “In the end, the floodgates opened,” said former Sen. Pete Domenici, R-N.M., who chaired the Senate Budget Committee when the first tax bill hit Capitol Hill in early 2001. Now, instead of tending a nest egg of more than $2 trillion, the federal government expects to owe more than $10 trillion to outside investors by the end of this year – and an additional $4 trillion to federal programs such as the Social Security trust fund. The national debt is larger, as a percentage of the economy, than at any time in U.S. history except for the period shortly after World War II. Polls show a large majority of Americans blame wasteful or unnecessary federal programs for the nation’s budget problems. But routine increases in defense and domestic spending account for only about 15 percent of the financial deterioration, according to a new analysis of CBO data.
The biggest culprit, by far, has been an erosion of tax revenue triggered largely by two recessions and multiple rounds of tax cuts. Together, the economy and the tax bills enacted under former President George W. Bush, and to a lesser extent by President Barack Obama, wiped out $6.3 trillion in anticipated revenue. That’s nearly half of the $12.7 trillion swing from projected surpluses to real debt. Federal tax collections now stand at their lowest level as a percentage of the economy in 60 years. Big-ticket spending initiated by the Bush administration accounts for an additional 12 percent of the shift. The Iraq and Afghanistan wars have added $1.3 trillion in new borrowing. A new prescription drug benefit for Medicare recipients contributed $272 billion more. The Troubled Assets Relief Program bank bailout, which infuriated voters and led to the defeat of several legislators in 2010, added just $16 billion – and TARP may eventually cost nothing as financial institutions repay the Treasury.
Obama’s 2009 economic stimulus, a favorite target of Republicans who blame Democrats for the mounting debt, has added $719 billion – 6 percent of the total shift, according to the new analysis of CBO data by the nonprofit Pew Fiscal Analysis Initiative. All told, Obama-era choices account for about $1.7 trillion in new debt, according to a separate Washington Post analysis of CBO data over the past decade. Bush-era policies, meanwhile, account for more than $7 trillion and are a major contributor to the trillion-dollar annual budget deficits that are dominating the political debate. As Congress prepares this week to launch a high-stakes battle over whether to raise the legal limit on borrowing, the analyses offer a clearer view of the drivers of the debt – and of the difficulty of re-balancing the budget without new tax revenue.
Most Republicans reject raising taxes as part of the solution; House Speaker John Boehner of Ohio has called it a “non-starter.” But Democrats won’t go for a proposal based solely on spending cuts. The annual surpluses that set the nation on this course emerged in the final years of the Clinton administration. What to do with the surplus became a central issue of the 2000 presidential campaign, with Vice President Al Gore arguing that much of it should be put in a “lockbox” to protect Social Security and Medicare. Bush pushed for a broad tax cut.
As soon as he took office, Bush pushed Congress to make good on his tax pledge. He got a boost from Federal Reserve Chairman Alan Greenspan, who testified before the Senate Budget Committee that “tax reduction appears required” to prevent the federal government from accumulating too much cash. A chorus of skeptics warned against spending the surplus. Still, Congress approved a $1.35 trillion tax cut in record time. A second package, worth $350 billion, followed in 2003. Together, they constituted one of the largest tax cuts since World War II, according to the conservative Tax Foundation.
Bush’s first Treasury secretary, Paul O’Neill, resigned after the White House decided to pursue the 2003 measure. “I believed we needed the money to facilitate fundamental tax reform and begin working on unfunded liabilities for Social Security and Medicare,” O’Neill said in an interview. But the White House, he said, “wanted to make sure economic conditions were great going into the president’s re-election.”
Proponents of tax cuts argue that the legislation merely returned tax collections to their appropriate levels. They note that the CBO’s 2001 forecast assumed that tax collections would stay above 20 percent of the nation’s gross domestic product – well above the historic average of around 18 percent of GDP. But some key advocates of the tax cuts now say such a large reduction in taxes was probably ill-advised.
“Nobody would have thought that all these things would have happened after you cut taxes,” Domenici said. “That you’d have two wars and not pay for them. That you’d have another recession. A huge extravaganza of expenditures” for the military and homeland security after the Sept. 11, 2001, attacks. “You would pause before you did it, if you knew.” In the end, Bush cut taxes and spent more money. Good times masked the impact. But after the economy collapsed during Bush’s final year in office, deficits – and therefore the debt – began to explode as Obama sought to revive economic activity with more tax cuts and federal spending.
Today, the CBO forecasts are unrelievedly gloomy, showing huge deficits essentially forever. As policymakers grapple with the legacy of the past decade, a wave of senior citizens is crashing at their doorstep, driving up the cost of Medicare, Medicaid and Social Security.
William Hoagland, who was for years a top budget aide to Domenici and other GOP Senate leaders, said it is simplistic to think today’s fiscal problems began just 10 years ago. Still, Hoagland said, the abandonment of fiscal discipline in the wake of the surpluses clearly didn’t help. “Nobody pushed for paying for this stuff,” he said. Not even after “it became very clear in the middle of 2003 that the line had turned on us. And the surpluses as far as the eye could see were no longer there.”
