Negotiating the Fiscal Rapids

Fiscal issues, upstaged by terrorism and war, have not been prominent in the 2004 election campaign, but they are certain to dominate the next presidency. From their first day in office, the president and his team will be forced to confront three daunting money problems:

• They must design a workable strategy for putting the federal budget deficit on a credible downward track.
• They have to rein in galloping increases in medical costs that are undermining the solvency of Medicare and Medi-caid and putting health insurance out of the reach of small and medium-size businesses and their employees.
• They must address the sure-to-be contentious debate over restructuring Social Security, especially as the baby boom generation begins to retire.

Negotiating skills are especially crucial because none of these problems can be solved by one political party alone, even if the president's party should win a majority in both houses of Congress. Solutions require ideological flexibility and a degree of bipartisan cooperation that has not been seen in recent years. For example, in Restoring Fiscal Sanity: How to Balance the Budget (Brookings, 2004), my colleagues and I show that it is unrealistic to think the federal budget can be completely balanced by cutting spending or raising taxes. The necessary spending cuts would be unacceptable to many in both parties, and so would the needed tax hikes.

Bringing the currently projected deficits under control will require bipartisan legislative packages involving a mix of spending cuts and revenue increases, reinforced by healthy economic growth. Reducing medical cost inflation will take increased reliance on market forces, which Republicans favor, combined with more government regulation (say, of pharmaceutical prices), which Democrats may find appealing. And if Republicans want to introduce private accounts into Social Security, they will have to give Democrats something they want, such as greater protection for low-wage earners.

These fiscal challenges cannot be solved at the federal level alone. State and local governments have a vital stake in how the federal government copes with fiscal dilemmas; they will insist on being part of the decision process. Reducing federal spending by slashing education, housing, child care, transportation and other programs only moves the fiscal crisis from Washington to 50 state capitals. Pressures on state and local budgets have eased a bit since the stresses of 2002-03, but not enough for these governments to absorb drastic federal cutbacks without pain. Moreover, their leaders will demand a voice in medical cost negotiations-as will the private sector-because the results affect their budgets big time. And although Social Security may appear to be an exclusively federal program, it cannot be restructured in isolation. Reducing benefits would force companies, states and localities to restructure their own pension systems.

Fiscal pressures put a premium on effective management at every level of government. The only way to reduce the impact of spending cuts on beneficiaries of federal programs is to find less expensive ways to deliver the services. As David Osborne and Peter Hutchinson wrote in The Price of Government (Basic Books, 2004), political leaders in an age of permanent fiscal crisis shouldn't even think about proposing higher taxes until they have convinced voters that they are running a tight ship: "Any significant change in the price of government is impossible until the majority of Americans feel they getting real value for their tax dollars."