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Reducing the Budget Deficit Requires More Than Just Health Care Reform

On the current path, budget deficits will exceed $9 trillion over the next decade. This calls for a dramatic shift in the country’s budget policy. Both the economic downturn and the list of policies Congress is likely to pass have caused budget projections to deteriorate to the point where no one can ignore the warning signals these numbers are sending.[IMGCAP(1)]

Even the most zealous deficit hawk would agree we should not try to reduce the deficit this year — or even next. The immediate priority should continue to be ending the recession. Attempting to balance the budget too soon could derail the recovery at the very wrong moment.

But Congress needs to work with the White House to immediately develop a credible plan to bring deficits down to a manageable level over the coming decade — beginning only after the recovery has clearly taken hold. An announcement of the plan itself would send reassuring signals to our creditors and financial markets. Similar efforts have worked around the world in past crises, where merely the announcement of a deficit reduction plan has helped to calm jittery markets and keep down interest rates, thereby bolstering a recovery.

Second, there’s the health care reform debate. Done right, reform could significantly improve the nation’s long-term fiscal picture; done wrong, it will make it radically worse. A $9 trillion deficit is a reminder that cost control — not the creation of an expensive new entitlement — should be the centerpiece of reform.

Thus far, none of the plans focus sufficiently on controlling costs. While no one knows precisely what changes will work or how much they will save, some of the most promising cost control measures include: increasing consumer cost-consciousness through larger co-payments and greater cost transparency; changing provider incentives to promote patient health rather than rewarding excessive procedures and services; and changing the special tax treatment of employer-provided health insurance which contributes to the over-consumption of health care.

The other necessary piece of fiscally responsible health care reform is scaling back the costs of any new and expanded coverage. Adding a trillion dollars in new spending is just not feasible given the budget challenges we already face. Instead we need to look at universal coverage as a responsibility as much as a right – those who can should pay their own costs, and we should better target the proposed government subsidies to those who need them most. A focus on catastrophic coverage would also help to scale back the bill.

Even at its best, health care reform alone will not be sufficient to deal with the country’s budget woes. Savings will likely not appear until a decade from now, and as the budget numbers show, the luxury of time is something we no longer have. Every area of the budget — from Social Security to defense to taxes — will have to be on the table to fix our fiscal problems, and a realistic plan to get the budget on a sustainable path will likely have to include a bit of pain for everyone.

Finally, the policies Congress is likely to pass would make the situation considerably worse. The largest culprits — extending the bulk of President Bush’s tax cuts, reducing the alternative minimum tax, and blocking the cuts in the scheduled physician reimbursements in Medicare — would cost nearly $3 trillion over the next decade – triple the amount health care reform is expected to cost.

Even given gaping deficits, policymakers are not proposing to pay for the continuation of these policies. They should. We could offset the cost of the tax cuts by broadening the tax base and eliminating many exemptions, deductions, and credits that run through the tax code. AMT reform could be funded with some of the auction proceeds from cap-and-trade rather than Congress giving the bulk of those revenues away. And the increased Medicare costs should be included in the overall cost of health care reform. If these changes aren’t worth the price, well, they shouldn’t be made. There just is no more room on the nation’s credit card.

What happens if we fail to alter the budget? At some point, lenders to the U.S. government will become so concerned about the state of our fiscal affairs that they will demand a higher return on their lending. That unwelcome increase in interest rates would both harm the economic recovery and increase the cost of the government’s borrowing, causing us to have to borrow even more and potentially setting off a vicious debt spiral. Budget changes are inescapable — let’s hope those changes result from politicians choosing to confront the fiscal realities rather than the markets forcing them to.

Maya MacGuineas is the president of the bipartisan Committee for a Responsible Federal Budget at the New America Foundation.

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