Rising Health Costs May Erase Cuts in Deficit

Despite all of its proposed tax increases and large cuts in defense spending, the budget proposed by President Clinton on Thursday would produce only moderate improvements in the longstanding “structural” federal deficit--the persistent gap between federal spending and revenues.

For a culprit, blame the ever-escalating costs of federal health care programs.

Clinton counts on improvements in the economy to bring down the overall deficit by some $50 billion over the next five years. In addition, his large defense cuts, an assortment of smaller domestic spending cuts and a healthy dose of new taxes are projected to reduce the deficit by another $450 billion.

With all that, the budget for fiscal year 1997 “will arrive at about a deficit of $205 billion . . . instead of what would be very close to about $350 billion” without Clinton’s proposed changes, Leon E. Panetta, director of the White House Office of Management and Budget, said Thursday.

But Clinton’s budget planners project that the deficit will begin rising again in a few years as health care costs continue to soar. And unless those costs are brought under control, they warn, all of the Administration’s planned deficit reductions will be wiped out early in the next decade.

This year, Medicare, Medicaid and other federal health programs will cost some $244 billion, soaking up roughly 16 cents of every federal dollar. But those sums will seem moderate by 1998, when health costs of $398 billion are projected to take 22 cents of each dollar, surpassing both Social Security and national defense to become the government’s largest single account.

In the past, devout budget cutters often have looked to defense or Social Security as the causes of red ink and the best potential sources of a cure. But defense spending already has come down sharply. As a percentage of the overall economy, the Pentagon budget is now at its smallest point since World War II. Clinton proposes to shrink it further, cutting it from 18% of this year’s budget to 14% in 1998. Military leaders, and Clinton as well, have said that cutting any deeper than that would be unwise.

As for Social Security, while the program remains huge, it no longer is growing as a share of the federal budget and is not expected to grow substantially until the baby boom generation reaches retirement age in the next century.

Health care costs, by contrast, are growing rapidly. Several factors have driven the growth. Spending on Medicaid, the joint state-federal program that pays for medical care for the poor, has increased sharply because the lingering recession has created more poor people and because Congress has expanded eligibility for the program--bringing in more pregnant women, for example.

Medicare, the federal program of health insurance for the aged, has grown along with the number of elderly Americans.

But the costs of both programs also have grown because of the overall high rate of inflation in the entire health care field. The impact of those soaring costs on the federal budget--paralleled by the burden similar health cost increases put on the private sector--provide much of the impetus behind Clinton’s drive to reform the nation’s health care system.

Clinton’s budget would make some cuts in Medicare costs by squeezing payments to medical providers. But Administration planners conceded that those cuts are only a stopgap. Without some way of bringing health care costs under control, they said, the deficit will begin to rise again in 1998, wiping out Clinton’s deficit reductions in short order.

For now, Clinton’s budget says nothing about how the health care system will be reformed, how much the reform will cost or what taxes will be raised to finance those changes. Those announcements will not come until next month. But the shadow of health care inflation looms over every other part of Clinton’s budget plan.

If current trends are allowed to continue, health care costs would “triple and, as we get into the next century, almost quadruple,” Panetta said. By contrast, Administration planners believe that, if they can manage to get health costs under control, they can keep the deficit on a slow, steady downward path until it reaches about $70 billion 10 years from now.

That figure would still not be a completely balanced budget. But a deficit of that size would be less than 1% of the total size of the economy--a level that most economists believe could be sustained without much difficulty.

Accounts of the federal budget generally focus on the overall size of the deficit--now running at about $310 billion. But most economists argue that the overall deficit number can be misleading. A sluggish economy drives the deficit up--reducing tax revenues, for example, and increasing outlays for unemployment insurance and other benefit programs--while a thriving economy brings the deficit down.

The deficit that remains once the impact of economic conditions is factored out--the structural deficit, which is now about $250 billion--provides the best picture of the true balance between federal spending and revenues.

On that score, Clinton’s plan makes some progress but would still leave the government with a substantial amount of red ink. Clinton’s plan projects that the structural deficit would fall to $201 billion in 1996 before starting to move back up again as health costs grow.

The Biggest Burden

The top targets of tax increases over the next four years in Clinton’s plan. Second column is the amount generated by the new measures:

Billions % of total raised tax hikes The Wealthy $95.8 40% Energy users 50.1 21 Corporations 22.8 9 Social Security* 22.0 9

* Alters benefits subject to taxation

Source: Office of Management and Budget