Budget dilemma pits raising revenues vs. spending cuts

President Obama says the federal government needs more revenue, while House Minority Leader John A. Boehner says it needs to spend less. One of them could walk out of this year’s congressional elections with a mandate to handle one of the most intractable problems facing the country.

Spending has risen since the late 1990s, and revenues dropped after President Bush’s initial tax cuts and two recessions in the last decade, and analysts say the worst is yet to come with the retirement of baby boomers and exploding health care costs.

Mr. Obama, speaking in Cleveland on Wednesday, argued the country can afford to extend tax cuts for middle- and low-income taxpayers, scheduled to expire at the end of this year, but said the government can’t afford to lose the $700 billion over the next decade that would come by extending tax cuts for the top two tax brackets.

But Brian Riedl, lead budget analyst at the Heritage Foundation, said the long-term problem is not that the government takes in too little money, but that it’s spending more money than it ever has.

“One hundred percent of the rise of long-term budget deficits is caused by above-average spending,” he said. “There is no long-term decline in revenue forecast in any way, shape or form.”

Mr. Riedl said that over the past 50 years government spending has averaged about 20.3 percent of the U.S. economy, and taxes have averaged about 18 percent. During the latest recession, revenues have dipped to near 15 percent, and spending has ballooned to about 25 percent, leaving the deficits of $1.4 trillion last year and a projected hole nearly that big this year.

The problem, Mr. Riedl said, is that spending is expected to continue to remain that high even as the economy recovers, so that by 2020, even if the Bush tax cuts are allowed to continue and the alternative minimum tax is fixed, revenues will still rise to 18.2 percent, but spending will be more than 26 percent of gross domestic product.

But James R. Horney, director of federal fiscal policy at the Center on Budget and Policy Priorities, said the United States regularly ran deficits over the past five decades, including sometimes substantial shortfalls, so shooting for the historical average is a bad target.

He also said with an aging population and government promises for health care and retirement benefits, there is no way to pay for that and for defense and other needs if the federal government continues to raise just 18 percent of GDP in revenues.

“The problem is that we have revenues that are not keeping up with spending, and the answer is bringing that back into line,” he said. “I think at the end of the day, it’s going to take a combination.”

Voters, though, aren’t being given that clear a choice.

Mr. Obama said Wednesday that deficits are a problem and promised to “spend the next year making the tough choices,” but he cast the upcoming election as a referendum on whether to allow the Bush tax cuts for the top two income brackets to expire.

He argues he already won a mandate to do that when he won the White House in 2008 while campaigning on a pledge of lowering taxes for the middle class and raising them on highest-income taxpayers.

“This isn’t to punish folks who are better off - it’s because we can’t afford the $700 billion price tag,” the president said Wednesday. “And for those who claim that this is bad for growth and bad for small businesses, let me remind you that with those tax rates in place, this country created 22 million jobs, raised incomes, and had the largest surplus in history.”

By letting the Bush tax cuts remain in place for the final two years of his term, though, he let the issue get pushed until just before November’s midterm elections. Republicans have grabbed the issue, arguing that the problem is not revenues but spending, such as last year’s $814 billion stimulus.

“We can’t deal with the deficit until we’re willing to get our arms around spending and have a strong economy,” Mr. Boehner said Wednesday, laying out an argument that top Republican congressional leaders immediately backed.

He called for leaving all of the 2001 and 2003 Bush tax cuts in place for two more years, and called on Congress to limit next year’s discretionary spending to the same level it was in 2008, before the stimulus and the Wall Street bailout bill passed.

He said that would come to $1.029 trillion, or nearly $100 billion less than Mr. Obama’s budget proposal to spend $1.128 trillion next year.

Still, Mr. Boehner would leave a lot of spending - entitlement programs such as Social Security and Medicare, as well as defense, homeland security and veterans funding - untouched, which means Congress would have the near-impossible task of squeezing $100 billion in savings out of the rest of the budget.

Judging by the polls, Mr. Obama should be getting the better of the argument.

A Newsweek survey taken at the end of August found voters strongly support more spending now to create jobs, rather than reducing the deficit, by a 57 percent to 37 percent margin. And asked what should happen to the Bush tax cuts for wealthier taxpayers, voters wanted them to expire, by a 52 percent to 38 percent margin.

But another poll, conducted by Ipsos Public Affairs, found some nuance in the tax question: 15 percent said let all the tax cuts expire, including for lower-income earners, while 31 percent said let only the higher-income tax cuts disappear, and 49 percent said extend them all.

Mr. Riedl said Republicans can strengthen their claim to a mandate from this year’s elections by offering more specific proposals.

“The mandate would be bigger the more specific their proposals are, and right now the Republicans have not offered much more than vague platitudes on how to rein in spending, with the exception of Paul Ryan’s plan,” he said.

Mr. Ryan, Wisconsin Republican, has offered a broad blueprint for changing Social Security and Medicare and holding down costs in those programs in order to bring the long-term budget into balance.

But Republican leaders have been reluctant to embrace the plan and have instead ducked questions about it.

Mr. Horney said there’s no way to say in advance what the right level of spending and taxes should be, but the discussion about how to bring them into balance is long overdue.

“At the end of the day, what budgeting is all about is determining what are the appropriate services and benefits provided by the government, given that we need revenues to pay for them,” he said.