Budget plan touches only the surface of long-term fiscal issues

As President Bush sends his roughly $3 trillion budget to Capitol Hill, two things are certain -- Democrats who control Congress will largely ignore it and it will only scratch the surface in addressing the nation's long-term fiscal problems.

Bush's top aides acknowledge the latter point, which is why Office of Management and Budget Director Rob Portman and Treasury Secretary Henry Paulson have been mainstays on Capitol Hill, reaching out to key Democrats to try to find areas of agreement.

But many of the assumptions in Bush's five-year balanced budget plan have little chance to see the light of day. Not even the Republican Congress over the last five years has attempted some of the deeper savings in Medicare, Medicaid and domestic discretionary programs that Bush's budgets have attempted, let alone Social Security.

"This will be Bush's first budget that is really, really meaningless," observed one lobbyist who follows the process closely.

Democrats and Republicans alike acknowledge that balancing the budget over the next five years is a worthy goal, but does not begin to address the exceedingly difficult choices lawmakers face.

"It would be nice to get there but the true issue here is the $60 to $80 trillion unfunded liability staring us in the face as a result of the demographics of the baby boom generation retiring and getting benefits, and that's what we have to address," Senate Budget ranking member Judd Gregg, R-N.H., said in a recent interview.

Such staggering numbers are difficult to comprehend. According to Treasury Department figures, the actual current "fiscal exposures" faced by the United States government at the end of fiscal 2006 totaled $50 trillion -- and was growing rapidly. That figure has more than doubled since 2001. Government Accountability Office Comptroller General David Walker has said that to cover such obligations it would cost about $170,000 for every American, or $440,000 per household. The annual median household income is $46,000.

Another way to look at it is the amount of money that must flow automatically to cover the cost of interest on the roughly $8.6 trillion national debt, which increases much faster than annual reported deficits show because "off-budget" items such as Social Security must be accounted for. The debt will hit $9 trillion for the first time this summer, Congressional Budget Office says.

House Budget Chairman John Spratt, D-S.C., says paying off debt is the most immediate entitlement obligation Congress must address, and that begins with balancing the budget.

"We're a day late and a dollar short doing it, but nevertheless we think it's a worthy quest to get back to the situation where we were beginning to reduce debt service as the single biggest and most important entitlement that we confront in the near future," Spratt said in a recent interview.

Interest on the debt in fiscal 2006 totaled $226.7 billion, a 24 percent increase over the previous year -- by far the biggest spending increase in the federal budget. Spratt estimates that figure could rise to $462 billion by fiscal 2017.

Current interest on the debt is more than the federal government spent on the entire Medicaid program last year. It is also more than what it spent in discretionary funds for the Education, Veterans Affairs and Justice departments combined, and more than total war costs in Iraq and Afghanistan in fiscal 2006, according to House Budget Committee Democrats and the nonpartisan Concord Coalition.

It is even more than the entire cost of low-income support payments made last year, such as Supplemental Security Income for the elderly and disabled, unemployment insurance, food stamps, child nutrition, child tax credits and the earned-income tax credit.

By 2040, interest on the debt could reach about 15 percent of gross domestic product -- chewing up nearly all of the roughly 18.5 percent of GDP represented by revenues flowing into the Treasury.

"When Americans pay their taxes each year, they are increasingly paying simply for the privilege of borrowing more and forgoing the opportunity to reduce existing tax burdens or to devote these same dollars to defense, education or other government services," according to a Brookings Institution report authored by a bipartisan group including former Reps. William Frenzel, R-Minn., and Charles Stenholm, D-Texas.

"The debt is the threat," Senate Budget Chairman Kent Conrad, D-N.D., says repeatedly. But it is hard to get people excited about such an abstract issue; interest on the debt currently represents only 1.7 percent of GDP, down from the consistent 3 percent range from 1985 through 1997, according to CBO.

The really scary part is the possibility interest rates will rise, observers say, particularly if the supply of foreign capital begins to dry up. Conrad has been warning for years about the possibility that foreign interests might one day decide to withdraw their investments in U.S. debt.

A Democratic budget analyst, who is not authorized to speak for the record, said that since 2001, 75 to 90 percent of new U.S. debt has been financed by foreigners. Interest rates have been historically low of late, the aide said, but "are going to come up in the future as the supply of capital is going to get smaller because foreigners aren't going to be able to keep up this pace."

The only way to cut the debt is to cut government benefits or raise taxes, but neither side has shown the political will to do either, the aide added. "Democrats are scared to talk about raising taxes. We don't want to be the ones providing all the pain," the aide said.

While Conrad and Spratt talk about paying down the debt, Republicans want to focus on spending cuts, mainly reforming entitlement programs.

"The real issue is government spending. You can't address debt service unless you're taking in what you're putting out," said Gregg. "I think they put the cart before the horse. It's a symptom of the disease; it's not the disease. The disease is the fact that you have this huge entitlement obligation hanging over our heads and if you don't address it, the debt will be out of control."