Politics

Is There Any Hope for Lowering the Deficit?

By Robert Hendin

February 2, 2010 / 11:33 AM EST / CBS News

(CBS)

Today's headlines would make any CPA scared: "A Red-Ink Decade" says the New York Times. "A Budget Written in Red Ink" says Politico and "Obama Budget would spend billions more" says the Washington Post.

With a projected deficit of $1.56 TRILLION this year and $1.27 TRILLION next year, Is there any hope for getting back to the black?

All sides agree that in a recession, government must spend more to spur economic growth and can't cut spending too quickly without fear of taking the country back into a stronger economic downturn. So what's the problem?

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"The real threat to county is not the deficit that we are running in a time of recession, which is today, it's the structural deficits that we'll run after the economy is growing," said David Walker, the president and CEO of the Peter G. Peterson Foundation, and the former Comptroller General of the U.S.

Those structural deficits are the mandatory spending that take up 60 percent of the federal budget – namely: Medicare, Medicaid, social security and the interest on the debt. In President Obama's proposed budget of $3.8 trillion -- $1.4 trillion is discretionary spending – spending that is not required by law and is up to the government to decide what to spend on. This includes spending on defense, security, education and interior among other things.

(AP Photo)

The rest of it, some $2.4 trillion out of the $3.8 trillion is going to mandatory spending. If you look at the projections in this budget, the government expects to make $2.567 trillion in revenues, the vast majority of that being individual's taxes. But my math, that would leave about $167 billion for all that discretionary spending. You know, the military and the other things the government does – including any actions taken to help homeowners, the economy, schools, states, etc.

That's why there is a deficit. How did it get so big?

The deficit grew dramatically in recent years as tax cuts in the early 2000s were coupled with wars and an expansion of a Medicare prescription drug benefit. As the economy was falling apart in the 2008, tax revenues dropped as jobs were lost, and the government was forced to spend over $700 billion to sure up the financial sector.

While some of that has been paid back, the next $700 billion on the stimulus has not yet been paid back as unemployment is still in double digits. As the economy grows and unemployment decreases, the return of Americans to the workforce will increase tax revenue.

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Increased revenue will start to help the deficit. So will the cuts in spending that the Obama Administration has proposed, as well as a freeze on some spending in the next few years. But because of the recession, the spending cuts are very moderate.

Walker says this alone isn't enough to right the budget woes.

"People need to understand, the hole that we are in is so deep, that you can't grow your way out, you can't tax your way out, you can't cut your way out, individually, we are going to have to do a combination of things, and the sooner we do it the better," he said.

(AP Photo/J. Scott Applewhite)

So what's the answer? The president is proposing a budget commission to look at the long term problems and to make recommendations about serious structural budget issues, primarily what to do with tax policy and entitlements – namely Medicare, Medicaid and Social Security, which are on a path to take up all of the government's income, leaving no money left for discretionary spending.

A similar proposal was struck down last week in the Senate as conservatives feared higher taxes and liberals feared cutting those beloved entitlement programs.

But, the president's proposed budget commission would only be tasked with balancing the budget outside the $200+ billion interest on the debt, which means that even with a balanced budget, the long term debt grows. Next year it's expected to hit 15 TRILLION DOLLARS.

So the debt commission, as Walker says, is still the best way to move forward, if it has the right people and the teeth to make hard choices that need to be made to fix the problem.

Many people have asked, what's the big deal, isn't this just funny money anyway? Most of the U.S.'s debt is owned by foreign governments. As those countries, like China, keep buying our debt, which is still highly valued, what's the problem?

"In the short to medium term, the biggest risk that we face is if we lose the confidence of our foreign lenders, then we will have to pay a lot higher interest rates in order to finance our debt," said Walker.

The long term picture is not rosy. "If that happens, it will have an adverse effect on the budget, an adverse effect on the economy, an adverse effect on interest rates across the board, and adverse effect on unemployment, less discretionary income for Americans," he said.

Here's a breakdown of President Obama's proposed 2011 budget spending by agency and the percent change from estimates for 2010.

(CBS)

Robert Hendin is a CBS News White House producer. You can read more of his posts in Hotsheet here.