Health Care Reform and the Budget Deficit

Download the complete speech as a printable PDF

Christina D. Romer
Chair, Council of Economic Advisers

Center for American Progress
Washington, D.C.

October 26, 2009

I. The Budget Deficit

In recent months, many have expressed concern about the budget deficit. This is a concern that President Obama and his entire economic team share. Indeed, it would be hard not to be concerned. Just last week, Treasury and the Office of Management and Budget (OMB) reported that the final estimate of the fiscal year 2009 deficit was $1.4 trillion, or roughly 10 percent of GDP.1 In the Mid-Session Review of the 2010 Budget issued last August, the Administration estimated that we were on a path that would result in a cumulative deficit over the ten-year budget window from 2010 to 2019 of $9 trillion.2

This projected ten-year deficit reflects three quite separate developments. First, a substantial fraction is the result of the terrible recession that began twenty-two months ago. Because tax revenues fall and spending on programs such as unemployment insurance rises when the economy sinks into a recession, the deficit naturally increases in these times—and provides automatic countercyclical stimulus. Unfortunately, even though we appear to have entered the recovery phase, unemployment is forecast to remain elevated for some time. As a result, weak economic conditions are predicted to have a negative impact on the deficit for the next several years.

Second, in response to the recession, the Administration and Congress have taken aggressive action. The $787 billion allocated to the American Recovery and Reinvestment Act (ARRA) and the $700 billion of total resources available to the Troubled Asset Relief Program (TARP) sound enormous. And, they do represent some of the boldest countercyclical and financial rescue operations in history. But both of these are one-time actions, and so their impact on the long-run deficit is small. Indeed, using estimates from the Congressional Budget Office (CBO) of the cost of the ARRA, including the associated interest expenses, the Recovery Act accounts for only about 10 percent of the cumulative projected deficits over the next ten years.3 Given that many of the TARP funds invested in banks last fall and winter are now being paid back with interest, its ultimate cost to the taxpayer is likely to be a fraction of its initial allocation. Furthermore, if these recovery actions prevented a calamitous economic collapse, as I firmly believe they have, they are in fact causing the deficit to be lower than it otherwise would have been, not higher.

Finally, by far the lion’s share of the projected cumulative deficit is due to policy actions taken in the last Administration. Economists Alan Auerbach and William Gale find that policies from the last eight years that we failed to pay for, including cutting taxes, introducing a new entitlement program for prescription drug benefits, and fighting two wars, are contributing approximately $700 billion per year to the budget deficit.4 Before those actions were taken, we had been on track to run large budget surpluses over the coming decade.5 As a result, in the absence of these actions, we could have had an economic downturn as severe as the current one and responded to it as aggressively as we have, all while keeping the budget roughly balanced over the next ten years.

To continue reading, download the complete speech as a printable PDF

1 U.S. Department of the Treasury, “Joint Statement of Tim Geithner, Secretary of the Treasury, and Peter Orszag, Director of the Office of Management and Budget, on Budget Results for Fiscal Year 2009,” http://www.ustreas.gov/press/releases/tg322.htm.

2 Office of Management and Budget, Mid-Session Review: Budget of the U.S. Government, Fiscal Year 2010, Table 1, p. 7, http://www.whitehouse.gov/omb/budget/MSR/.

3 CBO estimated that the non-interest costs of the ARRA over fiscal 2010-2019 would be $602.3 billion (Congressional Budget Office, “Cost Estimate for the Conference Agreement for H.R. 1,” February 13, 2009, http://www.cbo.gov/ftpdocs/99xx/doc9989/hr1conference.pdf). Their estimate of the interest costs (which refer to a version of the bill that differed slightly from the final bill) over this period is $346.4 billion (Congressional Budget Office, “Estimated Costs of Additional Debt Service That Would Result from Enacting H.R. 1, the American Recovery and Reinvestment Act of 2009,” January 27, 2009, http://www.cbo.gov/doc.cfm?index=9970). The total of $948.7 billion represents 10.5 percent of the estimated deficits of $9.05 trillion over the period 2010-2019 (Office of Management and Budget, Mid-Session Review, Table 1, p. 7).

4  Alan J. Auerbach and William G. Gale, “The Economic Crisis and the Fiscal Crisis: 2009 and Beyond,” unpublished paper, September 2009, Appendix Table 1, shows that in fiscal 2007 (which is prior to the antirecessionary tax cuts enacted in 2008), policy changes enacted under the Bush Administration added $723 billion to the deficit. They also report that this figure was projected to grow over time (p. 17). Thus, the $700 billion per year figure appears conservative.