Tangled Up in Red

Even by Washington standards, it's hard to imagine a more boring topic than the federal budget deficit. But like some ghostly apparition of Christmas past, the federal budget is once again facing enormous deficits and the implications for federal support of higher education-indeed, the implications for federal support of just about anything-are deeply troubling.

From Red to Black to Red

For the last third of the 20th century, federal budget deficits seemed to be an unalterable way of life. In the 1970s, the deficit was modest-growing from just $3 billion in 1970 to $74 billion in 1980. But the deficit grew steadily in the 1980s; by 1992, the federal government was $290 billion in the hole. In 1993, the Clinton administration put forward an economic recovery plan that raised taxes in an effort to shrink the deficit. And, slowly at first, the budget deficit fell. When the economy boomed in the late 1990s, federal revenues began to swell and the deficit melted away. In 1996, the deficit was $108 billion. By 1998, the federal government showed a surplus of $69 billion.

In 2000, just two years later, the federal budget surplus was a staggering $236 billion and the newly elected Bush administration, looking a decade ahead, predicted a cumulative surplus of $5.6 trillion in 2011. It looked like a golden era for the federal government, and topics formerly of interest only to academic economists-such as whether the government should pay off the national debt-became serious issues for policy makers.

But that huge surplus proved irresistible to politicians of both parties. And, after a great deal of discussion in the summer of 2001 about how big the tax cuts should be and who should get the bulk of them, Congress approved a huge set of tax cuts ($1.3 trillion over 10 years) requested by President Bush. The goal of this tax cut was to return some of the budget surplus to the taxpayers and provide a boost to the nation's slowing economy.

Unfortunately, the economic slowdown proved bigger than anticipated and this, coupled with the huge 2001 tax cut, reduced government revenues. At the same time that revenues fell, other forces (primarily the September 11 terrorist attacks and military action in Afghanistan and Iraq) pushed government spending higher. A further effort to jump-start the stagnant economy-the $350 billion tax cut approved in 2003-further reduced government revenues.

Very quickly, the budget surplus evaporated and deficits returned. The $127.3 budget surplus that the government enjoyed in FY 2001 became a $158 billion deficit by 2002. According to the Office of Management and Budget (OMB), the actual budget deficit total for the 2003 fiscal year is $374 billion. The Congressional Budget Office (CBO) has predicted the deficit in the current fiscal year (FY 2004) will be $480 billion. But that is hardly the final word. At press time, Josh Bolton, the president's budget director, admitted that the 2004 deficit is "likely to exceed $500 billion, even with the strengthening economy."

Long-term projections are notoriously inaccurate, but all of those that are available are sobering. The CBO takes the most "optimistic" view. It estimates that, over the next 10 years, the total deficit will be $1.4 trillion. Others are less sanguine. The non-partisan Concord Coalition, for example, argues that the assumptions behind the CBO estimate are questionable. The Budget Office assumes, for example, that the Bush administration's tax cuts will expire on schedule and not be renewed, despite the president's frequent request that they be made permanent. Moreover, the CBO estimates that government spending will increase no faster than inflation at the same time that the administration and Congress want a significant increase in spending for defense and homeland security. Nor does the Budget Office assume that a new Medicare prescription drug benefit will be approved; again, this is something that President Bush wants and that Congress may well provide.

After adjusting for these and other possible omissions in the CBO's calculations, the Concord Coalition suggests that the deficit for the next three years will be $523 billion in 2004, $436 billion in 2005, and $423 billion in 2006. Over the coming decade, the Coalition believes the total deficit will be a cool $5 trillion, compared with the $1.4 trillion estimated by CBO. Notes the Coalition: "If these budget projections are borne out, the coming decade is likely to rank as the most fiscally irresponsible in our nation's history."

Now What?

Not surprisingly, there is no consensus about how to reduce the deficit. The president has called for spending restraint as away of preventing the deficit from getting worse, and there is little doubt that spending in many parts of the budget will be more restrained in the future than it has been in the recent past. But even so, the emphasis to date has been on reducing the growth in federal spending, not on cutting it below current levels. On the other hand, Democrats have been quick to blame the president's tax cuts for causing the problem-or at least for making it much worse. Several Democratic presidential candidates have called for scaling back the tax cuts, but the likelihood of such a step is slim-especially if Congress stays in Republican hands following the 2004 elections.

The aging of the baby-boom generation will complicate the federal budget picture. The first boomers will be eligible for early retirement under Social Security beginning in 2008 and, in 2011, they will qualify for Medicare. As this happens, the federal government will be faced with the costs of providing Social Security benefits and health care coverage to a growing population of retirees who, thanks to advances in medical research, are likely to live longer than ever before.

The fiscal pressures that will be created by the retirement of the baby boomers are hardly a surprise-demographers have predicted them for a generation. Nor should we be surprised that the political system has been unable to generate the consensus needed to make major changes in public policy that would deal proactively with this looming problem. But our failure to do this will have serious consequences. Indeed, our inability to address the fiscal health of Social Security and Medicare in the brief window when the federal government enjoyed budget surpluses could easily prove to be one of the biggest failures of government in the last 50 years.

Trickling Down to the Campus

For higher education, the specter of federal budget deficits presents serious challenges. It is impossible to imagine American higher education without substantial federal government investment. In 2004 alone, the federal government will make more than $60 billion in grants and loans available for student assistance. In FY 2003, preliminary data showed support for research conducted on campuses totaled roughly $24 billion.

When the federal budget enjoyed a surplus, congressional officials increased spending for both student aid and research; indeed, it was during this era that Congress, over a five-year period, doubled spending for the National Institutes of Health. Now, with deficits seemingly omnipresent, a similar effort to double spending for research at the National Science Foundation is floundering-the money simply is not there.

Support for student aid also grew rapidly when the government was flush. Between 1999 and 2001, the maximum Pell Grant grew from $3,000 to $4,000, an increase of 33 percent-the most rapid growth in the program's history. However, in the subsequent three-year period, after deficits had reemerged, the maximum Pell Grant increased by just 1.25 percent.

In short, the amount of money federal policy makers spend on higher education has in the past and will in the future depend heavily on the financial health of the federal government. A surplus in the federal budget makes it possible for policy makers to increase funding. Higher education-both student aid and research-are priorities when the federal budget is in the black.

But deficits, especially in the presence of other major spending pressures, mean financial stringency. Federal support for student aid and research increased much more slowly during the federal government's big deficit years in the 1980s and '90s, and the early signals suggest that pattern is likely to be repeated.

Many policy makers believe that higher education is one of the nation's best hopes for long-term economic growth and social progress. But backing up that belief with hard cash is a tall order. Higher education spending-for both student aid and research-is an investment, and all investments get squeezed when the budget is in the red.

The bottom line is simple and ominous: Federal budget deficits matter and the reemergence of the federal budget deficit is not a good sign for the long-term well-being of colleges and universities, our students, or the nation.

TERRY HARTLE is senior vice president at the American Council on Education.

Copyright American Council on Education Fall 2003
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