The deficit is going down. Woo-hoo! Let the celebrations begin.
Oh, wait. That may not be altogether a good thing. Certainly not for Republicans. They need an out-of-control deficit to bludgeon Democrats into cutting more spending. It may not be good news for the economic recovery either. Budget austerity means slower growth. Want proof? Look at Europe.
The Congressional Budget Office estimates that this year’s federal budget deficit will drop from $1.1 trillion to $845 billion. Economists at Goldman Sachs project that we will get the deficit under control within two years. Why is this happening?
I think I’m going to start labeling certain posts WBI, for Wonky But Important. I’ll try to make these posts relatively brief, but they’ll all elucidate a policy point that I think we all should know in order to have an intelligent conversation.
Our first WBI is built around a March 8 CBO report brought to my attention this morning by Congressman Chris van Hollen—my very own Montgomery County Md. representative, I am happy to say—finding that half of this year’s expected budget deficit of around $800 billion—half!—can be laid at the door of the struggling economy.
In other words: When the economy is revved up, it reduces the deficit, because there are more tax revenues from all those employed people and businesses working to capacity (and, concomitantly, fewer government expenditures—there’s no need for stimulus spending or lots of unemployment benefits during a humming economy). They measure this in terms of what they call “automatic stabilizers”—the reductions in revenues and increases in outlays that are the result of the weak economy.
Some in Washington greeted the CBO’s first big report of 2013 with applause. Citing a budget deficit that has dipped below $1 trillion, they say Congress is done controlling the debt.
But a sober look leads to different conclusions. Even if the sequester remains, debt-to-GDP will reach 82% in 2023. Most alarming is what’s just beyond the CBO’s ten-year forecast. As the baby boomers enter their seventies, rising social insurance costs drive debt-to-GDP past 130% in 2033.
To avert a fiscal crisis, Congress must produce savings roughly twice the size of the sequester, and it must do so in large part by making the major social insurance programs solvent—something we all know needs to be done.
Here’s how we would do it:
Replace the sequester with better cuts. The non-defense sequester should be replaced at least one-to-one with mandatory program savings, primarily from fixes to Medicare. Defense cuts should continue but without the sequester’s restrictions.
Lock in new revenue from tax reform. Congress must establish an expedited process for tax reform that simplifies the individual tax code and raises $500 billion in revenue. We suggest phasing in a cap on deductions for those with more than $250,000 in income (the cap would exclude charitable deductions). We would also apply chain-weighted CPI to the tax brackets.
Authorize a Social Security commission. A select panel should propose a plan for 75-year solvency, and Congress should be required to vote on its recommendations with a simple majority by 2015. As a start, chain-weighted CPI that protects long-term beneficiaries should be done immediately.
Defuse future debt limit battles by linking to deficit targets. Congress should both raise the debt limit for two years and reform it, so that the debt limit automatically rises if the debt meets specified annual targets.
Some in Washington greeted the CBO’s first big report of 2013 with applause. Citing a budget deficit that has dipped below $1 trillion, they say Congress is done controlling the debt.
But a sober look leads to different conclusions.
Despite a recovering economy, debt will rise over the next decade, from 73% to 87% of GDP. Even if the sequester remains, debt-to-GDP will reach 82% in 2023. Most alarming is what’s just beyond the CBO’s ten-year forecast. As the baby boomers enter their seventies, rising social insurance costs drive debt-to-GDP past 130% in 2033.
Too many in both parties propose only to repeal or replace the sequester. In our new memo, we outline a different approach, one that saves twice as much as sequestration this decade and better prepares for the larger budget challenge coming in the next decade.
Governor Romney’s tax plan contains nearly $5 trillion in specific tax cuts over ten years. The Governor has also said his plan will not add to the deficit. To date he has only proposed one specific policy to make up the lost revenue—capping itemized deductions.
However, each version of the Romney plan falls well short of the promise he made to keep his tax plan revenue neutral. Based on our calculations, Governor Romney needs to find up to $4 trillion in additional revenue to make his numbers work.
Scenario I: Across-the-Board Cuts After the first decade, cuts would rise quickly to 20% in 2025 and reach 25% in 2029, leaving key national priorities starved.
Scenario II: Cuts if Social Security is Exempt Scenario II shows that if Social Security is exempted, cuts across other areas of the budget hit 26% in 2025 and surpass 30% in 2026, leaving gaping holes in key government services.
Scenario III: Cuts if Defense and Social Security are Exempt We find that if defense and Social Security are exempt, cuts across other areas of the budget reach 32% in 2025 and rise to 40% in 2033, crippling the basic functions of government.
If we don’t touch entitlements and we do soak the rich, our annual deficit in 2040 will be a staggering $3.3 trillion (in 2012 dollars). While some Democrats, like President Obama, have called for a balanced plan, too many in the base of the Democratic Party and the progressive movement claim that boosting taxes on the wealthy will largely fix our budget woes. As the data shows, that’s simply wrong.
Obamacare adds trillions to our deficits and to our national debt, and pushes those obligations on to coming generations. -Mitt Romney, 06/28/2012
Actually, the Congressional Budget Office says that the health care law will lower the deficit, by about $124 billion over 10 years. The reason is simply that the health care law has offsetting revenue and cost savings that exceed new spending.
Read more in our new memo debunking the 12 biggest myths about the Affordable Care Act.
“In a speech hosted Monday morning by Third Way, Hoyer revealed that he and other lawmakers are looking for the right moment to introduce a bill that would achieve the sorts of deficit reduction goals that have eluded Congress and the White House thus far.”
Third Way has calculated 10 ways the supercommittee failing to pass a deal would impact the everyday lives of Americans, particularly those who see very little value in government.
