By Clive Crook
Published: January 31 2010 19:42
American voters want more public services than they are willing to pay for. That is the country’s fiscal problem in one sentence. When it comes to public finance, the “live now, pay later” mentality that caused the economic collapse still prevails.
Figures show a strengthening recovery in the last quarter of 2009. Welcome as that may be, even a sustained expansion cannot balance the books in the longer term. On current policies, the permanent gap between spending and revenues is at least 6 per cent of output.
Will the administration’s new budget help? Not really. The US budget is not a policy announcement, but a minutely detailed wish-list. The press reports it gravely, in suspended disbelief. Congress then ignores it in whole or in part depending on how the wind is blowing. President Barack Obama’s new proposal, which Congress receives today, will say more about his reading of the political climate than about where fiscal policy is headed.
The wind has in fact shifted a bit. Mr Obama hears voters’ concerns about huge budget deficits and the long-term outlook for borrowing. But, like Congress, he understands that voters oppose the only remedies: lower spending and higher taxes.
Last week Mr Obama trailed two ideas. He called for a three-year freeze on non-security discretionary spending (less than 20 per cent of the budget) from 2011, and a bipartisan fiscal commission to come up with a comprehensive fiscal plan. Neither measure would be more than a beginning. Neither says which programmes need reform or which taxes have to go up. Weak as they are, they hit a wall of opposition as soon as Mr Obama suggested them.
Before Mr Obama spoke, Democrats and Republicans joined in the Senate to block a statutory budget commission, which the White House had (all too belatedly) supported. Mr Obama can still form a commission by executive order and says he will – but this will not bind Congress unless Congress agrees to be bound. Within hours of the State of the Union address, a spending freeze was voted down in the Senate. Democrats in the House served notice that they too are opposed.
For once, this is not a case of a polarised Congress failing to represent moderate opinion. Washington’s paralysis on fiscal policy reflects attitudes in the country. People are concerned about overborrowing – and right to be, since the US is headed for fiscal collapse. But they are also devoted to outlays in excess of revenues. The sensitivity of Congress to public opinion is in most respects a virtue of American democracy. Here, it is the core of the problem.
Cross-party coalitions are impossible to form on other issues, but not when it comes to defending the fiscal status quo. Entitlement reform? Social Security is untouchable. On this, Democrats take the lead. Medicare is untouchable too. Republicans used fear of cuts in the programme to defeat healthcare reform.
Infrastructure is a vital economic asset, say Democrats. You cannot mean to economise on national security, say Republicans. Tax increases on all but the rich are unjust, say Democrats. Tax increases on the non-rich are indeed wrong, say Republicans, but tax increases on the rich are counter-productive. What does the public think? “We agree with all of the above.”
National bankruptcy of the sort that Britain experienced in the 1970s or Latin America in the 1980s would break the impasse, and this is what it might take. This would be my prediction, if I had to make one. But there are better cures for alcoholism than liver failure.
The challenge is to flip the all-party, pro-spending, anti-tax coalition. One way might be to link specific spending more closely with specific taxes. The question to ask voters is not whether they want guaranteed health insurance, which they do, and higher taxes, which they do not. It is whether they are willing to pay higher taxes for guaranteed health insurance.
Slowly, very slowly, interest in a US value added tax is spreading beyond public-finance academics. Comeback America, an excellent new book by David Walker, formerly US comptroller-general and until 2008 head of the Government Accountability Office, includes this among its recommendations. The purpose is partly just to raise money. The book argues that tax increases and spending cuts will both be needed, and the hollowed-out US income tax system cannot deliver. If a VAT were tied to public spending on health, however, it would do more than raise money.
Unlike income tax, which more than 40 per cent of Americans no longer pay, a VAT would ask everyone to pay something. No part of the electorate could vote for guaranteed health insurance entirely at other people’s expense. Some Democrats would recoil at this idea, but there is something in it for them: revenue to support the services they value.
An idea like this needs a champion. Mr Obama would be ideal, but seems unlikely to step forward. Most likely, the existing coalition would prevail, Democrats denouncing an unfair regressive tax, and Republicans opposing any kind of tax. But maybe, just maybe, Democrats could see a way of supporting needed public services. And perhaps Republicans, searching deep into their collective memory, could find a trace of the fiscal conservatism they once represented, and regard a modest broad-based VAT as the lesser evil.
If not, there is always going bust.
Copyright The Financial Times Limited 2010.
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