SCENARIOS: Impact of U.S. budget reports

WASHINGTON Tue Aug 25, 2009 10:58am EDT

WASHINGTON (Reuters) - The White House and the Congressional Budget Office released new estimates on Tuesday of the scope of federal budget deficits and the health of the U.S. economy.

The Obama administration raised its projection for the budget deficit between 2010 and 2019 to a total of about $9 trillion, while the nonpartisan CBO, Congress' budget analyst, lowered its estimate for the 10-year budget deficit to $7.14 trillion.

Here's how these two reports could have an impact:

SLOW MOMENTUM FOR HEALTHCARE REFORM?

Already mired in controversy, President Barack Obama's drive for sweeping healthcare reform could take yet another hit. Opponents say that with the U.S. economy in recession and budget deficits at record levels, now is not the time for Washington to take on another expensive program.

The coming economic reports are "more likely to have an effect on preventing things from happening than causing things to happen," said Robert Bixby, executive director of Concord Coalition, the nonpartisan group dedicated to eliminating federal budget deficits.

Obama and many of his fellow Democrats in Congress stress that any healthcare reform bill that is enacted will have to pay for itself. But some critics say reforms that reduce the cost of the Medicare program for the elderly or raise taxes on the wealthy, for example, should go toward deficit-reduction and not for expanding the availability of health insurance.

CREATE A NEW GOVERNMENT COMMISSION?

When elected leaders lack the political will to take on a tough issue, they sometimes turn to an old standby -- creating a commission to do the dirty work.

For several years, some prominent members of Congress, Democrats and Republicans, have pushed for a commission to squeeze savings out of the Social Security retirement program, as well as Medicare and Medicaid, the federally run healthcare plans for the elderly and poor, respectively. As the U.S. population ages, these programs will become more and more of a drain on the Treasury -- to the tune of an estimated $53 trillion over the next 75 years.

Next week's White House and CBO reports, likely to forecast huge budget deficits for years to come, could give impetus to the commission idea.

Besides looking for cost savings, a commission likely would weigh tax increases too.

RAISE CHANCE OF TAX HIKES

Obama has made it clear he's no fan of former President George Bush's tax cuts for the wealthy. The new data could be just one more nail in the coffin for those tax cuts, which are set to expire at the end of next year. Ending the tax cuts for those making over $250,000 could bring in an estimated $600 billion in new revenues over 10 years.

But conservatives will complain that doing so will make for slower economic growth down the road.

SPUR ANOTHER TAX FIX

No matter how bad the economic forecast or deficit projections, the middle class won't be saddled with a tax increase. That means Congress will do another one-year "fix" to the Alternative Minimum Tax, which originally was aimed at the wealthiest. As inflation puts the middle class into the AMT's range, Congress has been doing an annual repair to shield the middle class, even though it costs an estimated $50 billion to $70 billion.

CHANGE DOMESTIC SPENDING PLANS

If the economy rebounds, and there are early signs of this, Obama and the Democratic Congress might try to keep the lid on spending on most existing domestic programs to demonstrate some level of fiscal responsibility.

But, if the economy remains stagnant, look for liberals to begin pushing for a second stimulus, despite any scary numbers from CBO and the administration's Office of Management and Budget.

THE RESULT

Unless Washington tackles a core problem: rising long-term costs of Social Security and Medicare, the experts see no significant improvement in the deficit picture, and ultimately, the economic picture.

Obama has promised to cut the deficit in half by the beginning of 2013. But doing so still leaves the United States with a deficit that year of around $650 billion, which many describe as "off the charts."

(Editing by Eric Walsh and Vicki Allen)

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