Introduction: While near-term deficit spending is needed to revive the economy, our long-term prosperity hinges on a plan to reduce our structural deficits and debt. That is the contention of three fiscal experts at The Center for American Progress— Michael Ettlinger, Michael Linden and Lauren Bazel—and in this strategy paper, they propose just such a plan. The key to a credible plan, they say, is having clear yearly targets for reducing deficits “over a reasonable amount of time.”
An Excerpt from the Report:
This paper proposes that the intermediate goal for 2014 be a return to the fiscal discipline that existed in the 1990s before the Bush era practice of cutting taxes while increasing spending and engaging in two expensive wars. The specific objective for 2014 is a budget that is in “primary balance”—where federal revenues equal program spending. There will still be overall deficits under this plan because of the cost of payments on past debt, but we will be paying for all spending on federal government programs by 2014 under this proposal. Our estimate is that a primary balance in 2014 will equate to an overall deficit of about 2.7 percent of GDP.
But undoing the deficit legacy of the Bush era is not enough. There are another set of forces driving our future deficits, as well. The aging of the population and rising health care costs have been putting more and more pressure on the federal budget—and that pressure is only going to increase. This has been well known for some time and was partially addressed under both a Republican president and a Democratic one. With bi-partisan support, President Reagan substantially extended the solvency of Social Security and President Clinton substantially extended the solvency of Medicare. Yet this discipline was lost under President Bush. In fact, the long-term problem was made worse when the Bush administration extended Medicare to prescription drugs without any plan to pay for it.
Another substantial challenge is cost of increased interest payments on the debt that has been built up by past deficits. These payments are projected to exceed 11 percent of all spending by 2013 and top 15 percent by 2019.
Once primary balance is achieved in 2014, the next goal should be overall budget balance by 2020. That is, revenues should be equal to all expenditures, including the cost of servicing the debt. Achieving a balanced budget will reduce our overall debt and our debt servicing costs. This declining debt burden will leave us less vulnerable to interest and exchange rate fluctuations and in a better fiscal posture to deal with crises. If we can achieve budget balance by 2020, the nation will be in a strong position to face whatever challenges may lie ahead. Unanticipated events may still intervene, but achieving the fiscal fortitude to withstand these crises by 2020 should be our ultimate goal.
This paper also offers a path for annual deficit improvement, starting in fiscal year 2011, with specific yearly targets. These signposts will prevent us from meandering off course and show the world that we are sincere about getting to our destination. Our recommendation is that Congress pass and the president sign statutory mechanisms to enforce these targets.
The fiscal challenges we face are serious, but not insurmountable. It would be a mistake to try and balance the budget in the next few years, but it would also be a mistake to put off any fiscal improvement until some undefined later date. We should adopt a credible plan for balancing the budget over a reasonable amount of time with clear targets along the way in order to avoid the most dramatic dangers posed by intransigent deficits. Adopting the plan offered here would demonstrate a very real commitment to fiscal sustainability, without the risk of undermining economic recovery.