CBO chief stands by claim: health care reform will cut deficit

In the wake of healthcare reform, Douglas Elmendorf hopes to make fewer headlines in the coming year.

As director of the nonpartisan Congressional Budget Office (CBO), Mr. Elmendorf sat in the eye of the storm as he and his staff estimated the costs of the various health reform plans put before them and projected their impact on the budget deficit.

But as talk now turns to how – and when – to address the sea of red ink the United States faces, Elmendorf’s views are still very much in demand.

“I don’t do ‘should,’ ” Elmendorf told reporters at a Monitor breakfast Thursday, meaning in his current role he cannot offer prescriptions for tackling record budget deficits.

Healthcare reform will reduce budget deficit

But Elmendorf did stand by the CBO's assertion that the healthcare reform package would reduce the budget deficit over the next 10 years – and in the 10 years after – and acknowledged Washington’s challenge in the choices it faces over taxes and spending.

“There are trade-offs,” he said. “The biggest challenge that fiscal policy poses to macroeconomic stability in the next few years is actually the rate at which fiscal stimulus declines.”

Elmendorf says he expects the budget deficit this year to be about 10 percent of gross domestic product. If the 2001 and 2003 tax cuts passed under President Bush are not extended, the deficit would fall from 10 percent of GDP this fiscal year to 4 percent in FY 2012.

“That decline of 6 percent of GDP is the most rapid withdrawal of fiscal stimulus that we’ve seen since the end of the Second World War,” Elmendorf says. “I think people who are concerned that actions that would raise taxes or cut spending in the next few fiscal years would accentuate this already rapid withdrawal of fiscal stimulus – I think that’s a very legitimate concern.”

Elmendorf suggested a consensus among economic experts that “some point beyond the next few years” would be the best time to reduce the deficit.

That view echoed a speech by Federal Reserve chairman Ben Bernanke on Wednesday, in which he said immediate deficit reduction would be “neither practical nor advisable” in the current economy.

Changing choices on government debt

There is no economic answer to the question of what represents a sustainable level of government debt in relation to taxes and spending, Elmendorf said. But “the choices are different from what they were in the past,” he continued.

Elmendorf compared spending on the main entitlements – Social Security, Medicare, and Medicaid – and defense spending. In 1970, entitlement outlays were 3.8 percent of GDP versus 8.2 percent in 2007. During that same period, defense spending fell from 8.1 to 3.9 percent of GDP.

In essence, the US paid for substantial growth in entitlement spending by reducing military spending as a share of GDP. But going forward, that cannot be repeated. The resources are not there.

“What that means is that the future expansion of those programs, relative to GDP – if it is to be paid for and not just to be borrowed – will have to be paid for by cuts in spending or increases in revenues that are directly visible to Americans in a way that I think defense spending is not,” Elmendorf says. “The choices will more directly affect people.”