Deficit's Future? We Ask White House's Orszag

Today marks the beginning of a new fiscal year for the U.S. government. It follows a year that ended with a projected $1.6 trillion deficit, a record. Thanks to a weak economy and expected increases in government spending, the federal budget is expected to run trillion-dollar deficits for at least a few years more. With so much focus on the country’s deficit, we sought out Office of Management and Budget Director Peter Orszag to find out how the man in charge of the country’s purse strings plans to tackle it. As director of the OMB, Orszag’s top priority is to find money for President Obama's agenda.

SmartMoney: Now that it looks like the economy has successfully backed away from the brink of another depression, what do you say to those who are worried about the deficit?

Orszag: Since it is desirable to allow the deficit to increase during an economic downturn, our focus should be the medium- and long-term deficits, after the economy has recovered. The first step in addressing those deficits is to stop making them worse, which is why the administration supports pay-as-you-go legislation, so that any new initiatives are paid for. If we had abided by this approach during the previous administration, the projected 10-year deficit would be $5 trillion smaller!

The next step is to address the key driver of long-term deficits: health-care costs. If health-care costs continue to grow at their historical rates, Medicare and Medicaid will double as a share of spending on federal programs within the next 30 years. The administration is committed to health-care reform that is not only deficit neutral over the next 10 years, but also puts in place key structural changes that will help reduce health-care cost growth thereafter.

Beyond that, we must also undertake steps like reforming government contracting, scrubbing each agency’s budget for additional savings, and exploring other deficit-reduction possibilities. That is precisely what we are in the midst of doing.

SmartMoney: What do you make of the pushback you are now getting from your old employer, the Congressional Budget Office (CBO), on the price of health-care reform?

Orszag: Addressing health-care cost growth is the key to our fiscal future. That’s the takeaway from long-term budget projections, whether done by CBO or other independent analysts. I have great respect for its staff and for the role that CBO plays in policy debates. At the same time, we need to remember that even the best referee sometimes gets things wrong, and when that happens, it is healthy to point it out.

SmartMoney: Health-care reform is not an easy sell to Americans unfamiliar with the specifics. What do you see as the OMB’s biggest challenges on this front?

Orszag: There’s a reason health-care reform hasn’t happened in 50 years. It is hard work. But just because it’s hard, doesn’t mean we can ignore it and hope it goes away.

There is strong evidence that medicine is practiced differently in different regions across the country, different cities, and even among different hospitals in the same city. And yet the higher cost areas and hospitals don’t generate better outcomes than the lower-cost ones. The biggest challenge is therefore to reconfigure the incentives and norms in our health-care system so that we promote better medicine, not just more medicine. And perhaps the biggest challenge contained within that challenge is that even though we have examples of low-cost, high-quality care already being delivered in some parts of the nation, we haven’t ever before reformed the whole system to deliver that type of care. Yet we must do so, because everyone agrees the current system is unsustainable.