Realistic Budget Targets and Some Initial Deficit Reduction Options
February 19, 2004
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Congress needs a realistic short-range budget target. Here's ours: Reduce spending to 19 percent of GDP and raise revenues to their long-run average of just over 18 percent of GDP by 2007. Getting there will be politically painful. It will require letting some tax cuts expire and "unaccelerating" others, reducing appropriations throughout the budget, and re-visiting the recently passed agriculture and prescription drug laws.
To help policymakers get started, two center-left think tanks, the Brookings Institution and Progressive Policy Institute, have published some new ideas for reducing the budget deficit, ranging from tax increases to spending cuts. Meanwhile, the anti-tax Institute for Policy Analysis has published a list of programs it would repeal.
Outline:
Realistic Budget Targets, Spending Cuts and Revenue Increases
Longer-Run Budget Targets and Entitlement Reform
Links to Deficit Reduction Ideas
So far, the main Congressional response to the deteriorating budget situation has been to start thinking about improvements to "budget process" rules.
This is a good thing, but it doesn't get to the heart of the problem. Until legislators and the White House begin to consider some painful spending cuts and tax increases, the budget won't return to balance, no matter how good the process is.
Meanwhile, the House and Senate Budget Committees are reportedly drafting a five-year budget plan, which will likely employ a number of gimmicks and unrealistic assumptions to "show" dramatic progress toward a balanced budget by 2009.
Realistic Budget Targets, Spending Cuts and Revenue Increases: Congress needs a realistic budgetary goal that is more immediate than 2009.
Centrists.Org believes the top priority of Congress and the White House should be to reduce the deficit to under 1 percent of GDP by 2007 (see Figure 1, below).
This should be done via both spending cuts and revenue increases, in approximately equal magnitudes.
We must also avoid budgetary gimmicks -- like using the Alternative Minimum Tax (AMT) to negate tax cuts for the middle class or omitting likely overseas military costs from the budget.
Figure 1.
Revenues must be raised from their current level of 16 percent of GDP to their historic average of just over 18 percent of GDP.
To reach that goal, some personal income tax cuts -- which were accelerated in 2003 to add fiscal stimulus to the economy -- should be allowed to flip back to their previous phase-in path at the end of 2004. This includes politically popular tax cuts like the child credit and marriage penalty relief, as well as the reductions in rates for taxpayers with high incomes.
Moreover, popular small business and corporate depreciation provisions -- which were enacted in 2002 as part of an earlier economic relief and stimulus effort -- should be allowed to expire at the end of 2004.
In the longer run, Congress and the President should work out a plan to smoothly phase out at least half of the tax cuts enacted in 2001 and 2003, but extend the remaining cuts permanently.
Spending must be reduced from 20 percent of GDP to 19 percent as soon as possible. This includes all spending -- entitlements, defense and homeland security outlays, and non-security domestic programs. (Interest on the federal debt is also part of the total spending picture, but Congress can only control that by reducing deficits.)
We can get started by cutting the size of the transportation reauthorization bill down to the level requested by President Bush.
Second, Congress should revisit the agriculture subsides enacted in 2002. Lowering payments to millionaire farmers and large agri-businesses should be a top priority.
Third, the Medicare drug benefit enacted in 2003 should be revamped. Instead of implementing a complex (and possibly unworkable) drug benefit in 2006, we should simply extend the interim drug discount card program and the "debit card" drug benefit for poor seniors, which will go into effect this summer. In 2006, Congress should expand the debit card benefits for poor seniors and add an automatic (zero-premium) catastrophic drug benefit for all Medicare beneficiaries. That is all the budget can responsibly afford at this time.
Fourth, legislators should carefully rake through their appropriations for many fast-growing sections of the budget. This should include the most vital programs like the Department of Defense, the various homeland security agencies, and the National Institutes of Health. Outlays are growing so rapidly in these areas that there is bound to be unnecessary and inefficient spending.
Finally, there are probably plenty of low-priority domestic programs that deserve to be cut or eliminated entirely. However, we shouldn't delude ourselves into thinking that cutting non-security domestic programs will enough to solve the budget problems. Cutting a few out-of-favor Democratic programs like police subsidies or housing supports is insufficient to the task.
Longer-Run Budget Targets and Entitlement Reform: As we get the budget back under control by 2007, we should also start the process of reforming the main entitlement programs: Social Security, Medicare, and Medicaid.
Reforming Social Security using personal accounts will have steep transition costs. That means we must completely balance the rest of the federal budget after 2007.
Ultimately, all federal spending has to be "paid for" by taxpayers. The U.S. can borrow from citizens and overseas investors to finance its budget deficits. But we will eventually have to raise taxes to pay the interest and buy down the debts. It's basically that simple.
The economy is recovering, but there is no indication that stronger economic growth will cause a surge of revenues that balances the budget by itself.
Putting off the necessary decisions until after the 2004 elections will just make the problem of re-balancing the budget harder to solve.
Links to Deficit Reduction Ideas: Centrists.Org can't vouch for the merits of the following suggestions and recommendations. However, we are heartened that think tanks on both sides of the political aisle are starting to publish them.
Brookings Institution Restoring Fiscal Sanity: How to Balance the Budget Isabel Sawhill and Alice M. Rivlin, editors (January 2004)
Progressive Policy Institute A Return to Fiscal Responsibility -- A Progressive Plan to Slash the Deficit by Paul Weinstein Jr. (February 2004)
Institute for Policy Analysis Putting Taxpayers First: A Federal Budget Plan to Benefit the Next Generation of American Taxpayers, by Stephen Moore (February 2004)
Other Links:
Centrist Policy Network "Stop Us Before We Spend Again?" (February 12, 2004)
Centrists.Org Deep Cuts in Non-Security Spending and Ultra-Rapid Economic Growth Won't Balance the Budget (February 2, 2004)
Centrists.Org The Fourth Entitlement: Interest (December 1, 2004)
Centrists.Org Issue Summary: Budget and Tax Policy (Basics)
