Financial Times Editorial - America's looming fiscal iceberg

America's looming fiscal iceberg
Published: March 8 2006 02:00 | Last updated: March 8 2006 02:00. Copyright Financial Times

Since the time of Ronald Reagan it has been a habit of US presidents to request a budget line item veto to curtail spending put there for the benefit of special interests. This week George W. Bush revived the tradition that had been struck down as unconstitutional by the Supreme Court during Bill Clinton's second term. But even if Mr Bush's proposal were to get round the courts, and through Congress, it would do almost nothing to address America's looming fiscal nightmare. In the five years that he had use of the measure Mr Clinton deleted only $2bn (£1.15bn) worth of spending. This year's budget deficit is forecast to exceed $400bn.

On purely political grounds, it makes sense for Mr Bush to be seen to attack pork barrel spending. The forthcoming trial of Jack Abramoff, the K Street lobbyist with close ties to the Republicans, will intensify public mistrust of Mr Bush's party in the build-up to the mid-term Congressional elections in November. Aware of its near rock-bottom credibility with the American public, the Republican-dominated Congress is holding hearings on ways to restrict the influence of lobbyists on the Hill.

Parallel to this, John McCain, the Republican senator, has submitted a bill that would cut back on the epidemic of earmarking, in which Congressmen insert irrelevant measures into broader spending bills designed to benefit constituents or preferred lobby groups. Last year earmarking added almost $50bn on to Congressional appropriations, most notoriously in the highways bill, which squandered billions of dollars on bridges that led nowhere and other frivolities. Yet even if - as this newspaper hopes - Mr McCain's bill were to succeed, it would not do much to assuage America's growing fiscal headache.

Bush officials point out he has submitted other ideas to restore "fiscal sanity". Of these, a proposal that would mandate Congress to pay for any spending increases with offsetting spending cuts or tax rises is the most notable. But Mr Bush's "paygo" mechanism is asymmetric since it does not mandate any equivalent action to offset the cost of tax cuts. Again, it is hard to avoid the suspicion that Mr Bush's real intention is political rather than fiscal.

In its defence, the administration also highlights the latest budget estimates by the Congressional Budget Office, which project America's fiscal deficit falling to 1 per cent of gross domestic product within five years from 2.8 per cent in the current fiscal year. But the CBO's figures are based on the premise Congress will choose not to make Mr Bush's tax cuts permanent when most of them expire in 2010 and that spending on Iraq, homeland security and the aftermath of Hurricane Katrina will remain constant. None of these assumptions is realistic. But even if they proved correct, they are still dwarfed by America's approaching crunch on healthcare and other entitlement programmes.

In just two years from now the baby boom generation will start to retire. Halfway through the term of Mr Bush's successor, the Social Security fund will start to decline. From then on the funding gap will get progressively worse, raising social security spending from 4.2 per cent of outlays in 2006 to 6 per cent by 2030. The outlook for Medicare and Medicaid is even gloomier.

Mr Bush lacks a credible strategy on any of these fronts. Restoring the budget line item veto looks like diversionary tactics - not so much shifting deckchairs on the Titanic as tap dancing to entertain its passengers.