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The Box Obama Built

Will the president be trapped by record high deficits?

12:00 AM, Oct 1, 2009 • By GARY ANDRES
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Once the health care debate ends, President Obama faces another daunting challenge: curbing an unsustainable level of debt in the federal budget. This is more than next year's problem because the two issues are also linked in a non-obvious way. Due to how Congress addresses deficit reduction, decisions on health care today will affect the White House's fiscal policy options in the future.

Few have mentioned this critical connection: health reform puts the president in a box, and the always politically risky tactic of raising taxes may be the only way out. The ghosts of the current reform effort will haunt Obama's ability to reduce red ink for the remainder of his tenure.

Earlier this year, Obama promised to cut the budget deficit in half by the end of his first term--reassuring words to independent voters and nervous financial markets. But following through on that pledge means working with Congress to enact major spending and tax changes--soon.

This year's focus on health care, climate change and economic stimulus means punting on the deficit for now. Yet waiting beyond next year is no longer an option. 2010 looks like the president's last chance to deliver on his budgetary commitment. But passing health care reform makes keeping that pledge even tougher. Here's why.

Presidents and Congress enacted major deficit reduction bills in 1990, 1993, 1997 and 2006. All these plans had one thing in common: they either cut or slowed the rate of growth in entitlements such as Medicare and Medicaid. Congress always includes this kind of spending reduction when it tackles the deficit. Why? That's where the money is.

Government red ink is projected to hit almost $1.6 trillion in 2009, according to the administration's latest projections released in August. Obama won't cut the deficit in half by the end of his first term by looking for loose change in his White House sofa. He needs big money--the kind of revenue generated by large tax increases or slowing the growth in major federal entitlement programs.

That brings us back to health care. President Obama also promised he would not sign a reform measure that added a dime to the deficit. So in addition to paying for the deficit reduction he promised, he also needs to pay for health care reform either through cuts in other federal programs or tax increases. For example, the legislation under consideration in the Senate Finance Committee finds at least some of its "pay fors" in the Medicare and Medicaid savings pot--just over $400 billion spread over 10 years, according to the Congressional Budget Office. Those are big numbers, likely to inflict pain on providers and recipients alike. Going back to the same pot of money to curb budgetary red ink next year may prove politically impossible. Congress rarely passes major cuts in entitlements or large tax increases two years in a row.

This law of political physics is dawning on many Washington observers like an apple dropping on their heads. "Using entitlement savings to pay for health care makes reducing the deficit next year that much harder," a Republican lobbyist insisted. He argued that big tax increases on businesses and wealthy individuals are about the only cards left in the deck. But playing that hand in an election year also includes a lot of political risk--particularly for vulnerable congressional Democrats from more conservative districts.

The stage is set for a major battle to reduce the deficit next year. The president has little choice but to engage. But the weapons available to prosecute the war on red ink are limited due to decisions on health care and other matters. Obama promised to cut the deficit in half by the end of his first term; he demanded a budget-neutral health bill; and he pledged that families making under $250,000 would not pay higher taxes. These choices have consequences.

Speaker Nancy Pelosi and other liberals in Congress have shown little aversion to "soaking the rich" and taxing big business to pay for their ambitions. That again looks like the most likely escape route from the box Obama has built. But it's also a course that could prove politically deadly for the Democrats.

Gary Andres is vice chairman of research at Dutko Worldwide in Washington, D.C., and a regular contributor to THE WEEKLY STANDARD Online.