World - US;Obama & McCain's fiscal plans add to deficits

Jackie Calmes

WASHINGTON: While both presidential candidates enter the campaign's final week promising to be the better fiscal steward, each has outlined tax and spending proposals that would make annual budget deficits worse, analysts say, with Senator John McCain likely to create a deeper hole than Senator Barack Obama would.

McCain, the Republican nominee, has proposed bigger tax cuts. He has also promised more in spending cuts, but he has not specified where most of them would come from. Even now that the financial crisis has given rise to one bailout package and prompted both candidates to call for billions more in stimulus spending, McCain has stuck by his promise to balance the budget by the end of his term, a pledge that fiscal analysts call unachievable.

Obama, his Democratic rival, has vowed to reduce the deficit and put it on a path to balance. He also promises an expensive effort to make health care insurance more widely available, a raft of other spending programs and tax cuts for most families and small businesses. He would raise taxes on the wealthiest households to help pay for his health care plans.

Neither presidential candidate has provided enough detail, especially about spending programs and what they would cut, for budget groups to put price tags on their agendas.

Conservative and liberal analysts agree that the next president should not be expected to balance the budget in his first term, because short-term deficit spending can stimulate the economy and the crisis is forcing the government to spend more in aid even as it collects less in taxes.

But for the long run, they say, the president's fiscal record will hinge on whether he can achieve the health care cost savings each promises, which in turn will help control the fast-rising expenses for Medicare and Medicaid. Neither candidate has a comprehensive proposal to address unsustainable growth in those programs.

"Neither one of them is being fiscally responsible," said David Walker, a former head of the Government Accountability Office who has long warned about the perils of deficits.

The next president will inherit economic challenges greater than any other president since Franklin D. Roosevelt 75 years ago. Yet while the country entered the Depression after a decade of budget surpluses, today's crisis hits a nation in worse financial shape — with growing wartime deficits, heavy borrowing from foreigners, and crushing retirement health costs for aging baby boomers looming.

The deficit for the 2008 fiscal year, which ended Sept. 30, was $455 billion, or 3.2 percent of total economic output. Analysts say it could reach $1 trillion in 2009, or more than 7 percent of projected economic output, with the country in recession and fighting a two-front war. During the 1980s, the deficit peaked at about 6 percent of economic output; economists consider anything above about 3 percent to be a worrisome level for the deficit.

So far, both McCain and Obama have insisted they do not have to have to scale back their pre-crisis platforms.

The fiscal outlook and history suggest otherwise. Among past promises that crashed against realities: Roosevelt's pledge to balance budgets, Ronald Reagan's and George Bush's antitax vows and Bill Clinton's middle-class tax cut. The current President Bush kept his biggest promises, for tax cuts and a Medicare prescription-drug benefit, but the national debt has doubled to more than $10 trillion during his administration.

Leon Panetta, who was Clinton's first budget director, said he had warned Obama of the realities ahead, should he win. "I've told him, Bill Clinton found this out. He walked into the Oval Office, and suddenly he found he had a bigger deficit than he even thought he had." Clinton's reaction, he said, was, "I'm not going to be able to do what I want to do!"

McCain's proposed tax cuts would mean about $1.5 trillion in lower revenue over his term, according to the nonpartisan Tax Policy Center. Extending the Bush income tax cuts of 2001 and 2003 beyond their scheduled 2010 expiration would account for more than a third of that total. He also would change the alternative minimum tax to hit fewer middle-income taxpayers, reduce corporate income taxes and accelerate business write-offs for equipment. The 10-year cost of McCain's tax plan would be as much as $4.2 trillion, the center says.

The Republican's health plan mostly seeks to reduce prices. McCain would also provide a tax credit of up to $5,000 a family to buy insurance, at a cost of about $800 billion through 2013. To partly offset that, he would make workers' employer-provided health benefits taxable as income. He also proposes savings from unspecified changes in Medicare and Medicaid.

McCain has fewer spending initiatives than Obama. His main one is to increase the size of the military. He proposes energy incentives, offset by selling permits for emissions of heat-trapping gases that are believed to contribute to climate change. He also offers income supplements for older, low-income workers and more financing for the No Child Left Behind education law.

To help balance the budget, McCain claims billions of dollars in savings from reducing forces in Iraq. Neither he nor Obama, however, account for the increasing deployments to Afghanistan. McCain also calls for cutting "corporate welfare," ending spending earmarks for special projects and freezing domestic appropriations in his first year.

By his final budget for 2013, McCain estimated he would cut $114 billion — he does not say how — to reach balance. He would still be about $200 billion short, according to an analysis by the nonpartisan Committee for a Responsible Federal Budget. But that estimate does not include the costs of the $700 billion financial bailout package already passed by Congress (its proponents say much of the price tag will be recouped by the government in the long run) or any additional economic stimulus plans that Congress might approve in coming months.

Robert Bixby, executive director of the Concord Coalition, a centrist budget watchdog group, estimated McCain could fall about $600 billion short in 2013, roughly the annual cost of Medicare.

Obama would extend the Bush tax cuts for taxpayers making less than $250,000 a year, and repeal them immediately for those above that level. He would cut other taxes, including for low-income workers and small businesses, and raise taxes on the dividends and capital gains of the affluent. Like McCain, he would change the alternative minimum tax to apply only to the rich, as intended, and close corporate loopholes, most of them unspecified.

Obama says the new revenue from higher taxes on the well-off would pay for his health plan, which would cost an estimated $115 billion the first year, but increase after that. That still leaves his tax cuts for everyone else to add to the deficits.

The Tax Policy Center estimated that the overall revenue loss would be nearly $1 trillion for Obama's term, and $2.9 trillion measured over a decade. Annual federal spending, which exceeds 20 percent of gross domestic product, would grow under both men's plans. Revenue would continue to be a lower percentage, measured against the size of the economy — 18.3 percent under Obama, and 17.6 percent under McCain, according to the tax center. The difference signals continued, deepening deficits.

The size of both candidates' tax cuts troubles many budget analysts. Even if the next president succeeds in reining in health care costs, said Joseph Minarik, senior vice president of the business-supported Committee for Economic Development, those savings will take years to appear while the tax cuts would be immediate.

Obama's spending plans, beyond his health care initiative, would mean increases for education, infrastructure, research and foreign aid, and more for bolstering the military than McCain has proposed.

He has a more ambitious climate-change proposal, mandating that companies buy emissions permits at government auctions. The Congressional Budget Office estimates that those could bring in up to $300 billion annually by 2020. Obama would use the initial revenue for energy initiatives and tax rebates to offset many Americans' fuel costs.