By Andy Sullivan
WASHINGTON (Reuters) - When he releases his budget proposal on Tuesday, President Barack Obama will be able to celebrate the smallest deficit since he took office in 2009. He also will be able to enjoy a cease-fire in the fiscal battles that have paralyzed Washington for the past three years.
But a troublesome fact lurks behind the good news: Obama and his Republican adversaries still have done little to improve the United States' long-term fiscal outlook.
Though tight spending caps have already shrunk spending by the Pentagon and other government agencies to their lowest levels in 50 years, they will do nothing to slow the steady growth of government health and retirement costs as the nation's millions of Baby Boomers age.
Absent dramatic tax increases, spending on the elderly -- Social Security retirement benefits and Medicare health insurance -- will crowd out education, scientific research, transportation and other programs that boost economic competitiveness, experts say.
"There aren't any solutions that don't have at least some element of discomfort," said Jim Kessler, senior vice president for policy at Third Way, a centrist Democratic think tank. "Everyone says this needs to be done, but like climate change it's easy to put off until another year.
Neither party appears eager to tackle the problem any time soon.
Republicans who prompted a 16-day government shutdown in October have since agreed to a compromise on spending levels and have quietly allowed the government to expand its borrowing capacity. Party leaders plan to spend the months ahead of the November congressional elections focusing on Obama's unpopular health-care law, rather than pressing for further cuts.
The White House, meanwhile, will emphasize new spending measures to boost economic activity.
Last year's proposal to slow the growth of Social Security benefits will not be included in this year's plan, officials say, because it failed to bring Republicans to the bargaining table. Last month, both parties agreed to reverse modest cuts to military pension benefits that they had approved in December.
A VICTORY OF SORTS
The exhaustion is understandable. Republicans who have tried to deliver on their promise to slash government spending have seen their approval ratings plummet in the wake of the October shutdown, which was prompted by a failed attempt to cut off funding for Obama's Affordable Care Act.
All along, Democrats have shown little appetite for spending cuts that they say hurt the economy and undermine important government services.
Both sides can claim victory, to an extent.
Spending cuts that Republicans won in the Budget Control Act of 2011 have shrunk discretionary spending to its lowest level since 1962, when measured against the economy. It is projected to decline further in coming years.
"Government spending is ... less out of control because of what's happened in the last few years," said Kevin Hassett, an economist with the American Enterprise Institute, a conservative think-tank.
Democrats, meanwhile, won a return to higher tax rates on the wealthiest households in the so-called fiscal cliff battle at the end of 2012 and prevented Republicans from enacting steeper spending cuts. They also argue that the Affordable Care Act will force doctors and hospitals to provide care in a most cost-effective manners in coming years, slowing the growth of Medicare and Medicaid, the health plan for the poor.
An improving economy has also contributed to a healthier government balance sheet as consumers and business contribute more in taxes.
Budget deficits, which spiked to 9.8 percent at the height of the recession in the 2009 fiscal year, are projected to shrink to 3.0 percent this year, according to the nonpartisan Congressional Budget Office, a level that many economists consider to be sustainable.
Those gains will not be enough to counteract a more inexorable force: the aging of America. The CBO predicts spending on Social Security and Medicare will nearly double over the coming 10 years.
The government's borrowing costs are also projected to increase as interest rates rise back to normal levels.
As a result, budget deficits will start widening again and the country's total debt load will continue to creep upward, the CBO predicts.
REFORM FOR THE LONG TERM
Many budget experts say Washington has gotten it backwards. A better approach would have been to gradually phase in benefit cuts while leaving intact spending levels on transportation infrastructure and other programs to boost an economy that has been slow to recover from the 2008-2009 recession, they say.
"We've had austerity in the near term for the basic government, but not reforms to slow the growth in the long term, which is the opposite of what both the economy and the budget needed," said Ed Lorenzen, a senior adviser with the Committee for a Responsible Federal Budget, a non-partisan group.
Lawmakers have found that it is politically easier to cut federal agency budgets rather than Social Security and Medicare, which deliver benefits to seniors, who are among the most politically active voters.
Any substantial reforms provide fodder for attack ads. Republicans have savaged Democrats over Medicare savings in the Affordable Care Act that will, over time, reduce payments to doctors and hospitals, while Democrats have hammered Republicans for their proposal to partially privatize seniors' health coverage.
Powerful groups like the seniors' lobby AARP, meanwhile, have blocked changes that enjoy bipartisan support, such as a proposal to make wealthy retirees pay more for Medicare.
But lawmakers who punt on benefit reforms are only delaying the inevitable, budget experts say.
"Either modernize how government services are provided, by looking for more public-private partnerships, or reduce entitlements a lot, or increase taxes a lot," Hassett, of the American Enterprise Institute, said. "Those are the choices."
(This story has been refiled to recast headline to remove reference to 'fiscal cliff')
(Reporting by Andy Sullivan; Editing by Caren Bohan and Leslie Adler)