August 2011

Putting the Brakes on U.S. Debt

As the world continues to struggle with the economic recovery and increasingly overwhelming debt levels, many are looking to Switzerland’s rather novel method of controlling its government debt, the Swiss “debt brake.” Germany has recently adopted a partial debt brake rule, and there are some discussions taking place about a debt brake rule to cover the entire set of euro zone countries.

The Swiss made it through the Great Recession relatively unscathed compared to most countries. In fact, the Swiss economy is facing a different kind of crisis: their currency is becoming too strong and the country’s exports are having trouble competing. Nevertheless, the Swiss “debt brake” is cited as one of the reasons for the country’s largely successful navigation of recent economic turbulence. With Germany and others looking to the Swiss debt brake as a model for their own fiscal rules – and as the U.S. debates its own fiscal future – we thought it would be helpful to provide some background. In this blog we will attempt to go into some detail on the history and function of the Swiss debt brake, and talk a little about how it works.

The Swiss government is generally known for its fiscal frugality. Toward the end of the 1990s, however, the country’s debt level grew to an uncomfortable 51 percent of GDP (still far below many other developed countries at the time). Subsequently, the debt brake was enshrined in the country’s constitution in 2001 after receiving 84 percent of the popular vote.

Effectively, the rule aims to maintain a structural budget balance every year. The rule allows deficits to be run in a recession, but requires surpluses in better economic times so that over the cycle the budget is in balance.

The debt brake rule specifies a ceiling on central government expenditures, looking forward a year, equal to predicted revenues adjusted by a factor reflecting the cyclical position of the economy. It is then possible to run deficits in a recession, but over the medium-term deficits and surpluses are expected to roughly cancel each other out. Differences between budget targets and estimates and actual outcomes are recorded in a notional account. If the negative balance in the account exceeds six percent of expenditure, Swiss authorities are required by law to take measures sufficient to reduce the balance below this level within three years. An escape clause exists, by which Parliament may allow deviations to the rule in exceptional circumstances. Because of its flexibility in allowing for surpluses and deficits, the debt brake rule evades one of the shortcomings of a typical balanced budget rule, which is that they are inherently pro-cyclical and often do not allow governments to respond to economic downturns.

The Swiss economy weathered the economic crisis much better than most countries, and many credit the debt brake for helping the country maintain a relatively stable debt level. In the Peterson-Pew Commission on Budget Reform’s 2010 report, Getting Back in the Black, the commission suggested that Switzerland offers lessons for the U.S. and other countries to learn from on controlling debt. As getting our own fiscal house back in order seems increasingly difficult and unlikely, perhaps its time to look abroad for some guidance.

‘Line’ Items: Fair Edition

Fair Time – We are smack in the middle of fair season. Fair goers across the country are getting their fill of fried food and tractor pulls. It is fair time for the economy, too, as every day the markets seem to mimic a carnival ride with large fluctuations signaling uncertainty and volatility, and slow growth fueling fears of another recession. How to spur the economy in the midst of mounting national debt will be a key question for presidential candidates as campaigns rev up and as the new congressional super committee begins its deliberations.

“Super Committee” Members Named – The 12 members of the “Super Committee” tasked with reducing the deficit got their capes last week. The bipartisan, bicameral group was created by the debt ceiling agreement. Its goal is to produce a plan with $1.5 trillion in deficit savings by November 23 that Congress must vote up or down. If such a plan is not agreed to, then automatic spending cuts in defense and domestic spending will be triggered. The members of the Joint Select Committee on Deficit Reduction are Sen. Patty Murray (D-WA, co-chair), Sen. Pat Toomey (R-PA), Sen. John Kerry (D-MA), Sen. Jon Kyl (R-AZ), Sen. Max Baucus (D-MT), Sen. Robert Portman (R-OH), Rep. Jeb Hensarling (R-TX, co-chair), Rep. Chris Van Hollen (D-MD), Rep. Dave Camp (R-MI), Rep. James Clyburn (D-SC), Rep. Fred Upton (R-MI), and Rep. Xavier Becerra (D-CA).

US still Aaa OK with Moody’s, for Now – Credit rating service Moody’s reaffirmed its highest rating (Aaa) for the US last week, choosing not to follow Standard & Poor’s in downgrading the US (read “Understanding the S&P Downgrade”). However, Moody’s did put the US on a “negative outlook” and warned that a downgrade could occur in the next year if additional savings were not found. As reported by Reuters, a Moody’s analyst said in a report, “For the Aaa rating to remain in place, we would look for further measures that would result in the ratio of federal government debt to GDP, for example, peaking not far above the projected 2012 level of near 75 percent by the middle of the decade and then declining over the longer term.”

Presidential Campaign Kicks Off – The 2012 presidential campaign began in earnest last week with a major debate among the GOP candidates in Iowa and the Ames Straw Poll on Saturday. In advance of the debate, CRFB offered some questions the candidates should be expected to answer. No doubt that fiscal policy will be a big issue in the campaign.

Key Upcoming Dates

September 6

  • Senate back in session.

September 7

  • House of Representatives back in session.
  • Debate at the Ronald Reagan Presidential Library in California for 2012 Republican presidential candidates. [Corrected]

September 16

  • The Joint Select Committee on Deficit Reduction must hold its first meeting by this date.

October 1

  • New fiscal year begins. Legislation fully funding the federal government, or a stopgap measure with temporary financing of government operations, must be enacted by then.

October 14

  • Congressional committees must submit any recommendations to the new Joint Select Committee on Deficit Reduction by this time.

November 23

  • The Joint Committee is required to vote on a report and legislative language recommending deficit reduction policies by this date.

December 2

  • The Joint Committee report and legislative language must be transmitted to the president and congressional leaders by this date.

December 9

  • Any congressional committee that gets a referral of the Joint Committee bill must report the bill out with any recommendation, but no amendments, by this date.

December 23

  • Congress must vote on the bill recommended by the Joint Committee by this date. No amendments are allowed.

MY VIEW: Bill Frenzel

In a commentary for CNN, CRFB co-chair Bill Frenzel lamented the small goal that the Joint Select Committee on Deficit Reduction (or the "super committee") is aiming for, arguing that it will not lead to the kind of grand compromise that we need.

Because the goal of $1.2 trillion in savings is so small, he said, even if the committee succeeds, it will not do much to stem the tide of red ink or address the drivers of our long-term debt.

Until the major drivers of deficits and debt are one the table -- entitlements -- the Congress will be playing touch football with the deficit/debt problem. Democrats protect entitlements; Republicans protect taxes. Difficult compromises are required, but the super committee, unfortunately, does not have this kind of heavy lifting in its charter.

Even assuming super committee success, the net of all this is that our president and our Congress will have spent a year at hard labor working on modest reductions, none of them aimed at the real drivers of our deficits and debt.

Click here to read the full commentary.

 "My Views" are works published by members of the Committee for a Responsible Federal Budget, but they do not necessarily reflect the views of all members of the committee.

How Other Countries Have Regained AAA Ratings

Over at Ezra Klein's blog, Sarah Kliff writes about the "Maple Leaf Miracle," or how Canada was able to turn itself around after it was downgraded. Considering our current situation, it seems appropriate to revisit the countries that we talked in our paper on fiscal turnarounds last year and see how well they line up with our table released the other day of countries that have lost their AAA credit rating only to regain it at a later time.

Our fiscal turnarounds paper went into four countries' fall from grace and subsequent rebound: the aforementioned Canada, Denmark, Finland, and Sweden. We also talked about Ireland, but they have fallen on hard times again in the wake of the 2008 financial crisis and have yet to rebound.

The table below is from our paper on the S&P downgrade, detailing all the countries that have been downgraded from AAA by S&P. After the table is a detailed summary of the four countries' journey from AAA and back.

  • Canada: After years of running deficits, Canada suffered from a high and mounting debt. After the Mexican peso crisis in 1994, Canada was seen as next on the global "chopping block," and after Moody's downgraded Canada from AAA in 1995 (with debt at 70 percent of GDP), our neighbors to the north decided to act on their fiscal imbalance. Most of the fiscal adjustment came on the spending side, with cuts to civil service, wage freezes, transfer of some responsibilities to provinces, and other program reductions. Aided by the slide of Canadian dollar against the U.S. dollar--which boosted Canadian exports--and the general economic boom in the mid- to late-1990s, the measures worked, returning surpluses to the Canadian budget in the late 90s and returning Canada to AAA status in 2002.
  • Denmark: In Denmark's case, they experienced a serious fiscal deterioration as a result of the early 1980s recession; public debt rose from 29 percent of GDP in 1980 to 65 percent in 1982. In addition, in an environment of high interest rates, the interest costs on that increased debt were also severe. Faced with a downgrade from S&P in 1983, Denmark undertook a huge fiscal consolidation plan, which relied on revenue for a little more than half of the deficit reduction. Also, many benefit and transfer programs were cut. As a result, the sharp rise in debt was halted by the middle part of the decade. A further deficit reduction program put debt on a declining path in the 1990s, and Denmark regained its AAA rating with S&P in 2001.
  • Finland: Finland had a banking crisis in the early 1990s that led to a severe recession. The annual fiscal balance swung from 6 percent of GDP surpluses before the crisis to an 8 percent deficit in 1993. Government debt shot up 50 percentage points of GDP from 1990 to 1994 (10 to 60), and S&P downgraded the country in 1992. In response to both the banking and the fiscal crisis, Finland took many steps. They attempted to shore up the banks by issuing a blanket guarantee of deposits; also, they injected capital into banks or took them over when necessary. On the fiscal side, much of the adjustment was on the spending side, including reforms to many entitlements. However, the consolidation effort also included some tax base broadening and the introduction of a value-added tax (VAT). As with many deficit reduction efforts, the plan was helped by a devaluation of the currency that increased global competitiveness. The efforts helped stabilize, then reduce, the debt path of Finland, returning them to surpluses in the late 1990s. They regained their AAA rating in 2002.
  • Sweden: Sweden faced a similar situation to Finland. Financial problems lead to fiscal problems in the early 1990s. As a result of the financial crisis, Sweden turned to fiscal expansion, partially through efforts to shore up the banking sector, which resulted in spending rising from 59 percent of GDP in 1990 to 70 percent in 1993 (while revenue stayed at 59 percent of GDP). Sweden was hit with a downgrade in 1993 and turned to fiscal consolidation in 1994. Much of the adjustment was to a wide variety of social benefits, although increased income and payroll taxes were also involved. Again, an exchange rate that helped boost Swedish exports played a role in diminishing the contractionary effects of the deficit reduction. The combination of economic recovery and fiscal consolidation put debt on a declining path as of the mid 1990s, while the fiscal balance went from an 11 percent of GDP deficit in 1994 to a 5 percent surplus in 2000. Sweden regained their rating in 2004.

These countries faced broader concerns about their fiscal position, yet were still able to turn things around and regain their fiscal credibility. The U.S. has only been downgraded by one major credit rating agency, and we still have time to make the necessary adjustments without the context of a crisis. But we have to get going on a comprehensive plan.  

To read our fiscal turnarounds paper, click here.

To understand the S&P downgrade, click here.

Obama Administration Takes Further Steps to Help the Housing Market

With the housing market still depressed almost five years after the housing bubble burst, the Obama administration is seeking input from private investors on methods to convert foreclosed properties owned by Fannie Mae and Freddie Mac into rental homes.

Currently, the two GSEs have about 250,000 foreclosed homes, which is about half of the total unsold repossessed properties on the market. Obviously, this collection of unsold homes is depressing the market by pushing down housing prices, and the lack of recovery in the housing market in one of the major attributions to why the pace of overall economic recovery has been tepid. Also, rents in many urban areas have been rising rapidly due to increased demand of rental units and not enough supply. 

Faced with these two problems, the administration is trying to take the foreclosed properties off the housing market and push them into the rental market. This proposal would push housing prices up by removing the glut of foreclosed homes from the market, while putting downward pressure on rental costs by increasing the supply of rental units available.

The administration is looking for proposals from investors, so the exact details of this move are not clear. As for budgetary effects, it does not appear that this plan would have significant direct effects (although since the US is backing Fannie and Freddie, their losses might have to be recouped from the budget), but we will have to see what the final move is. What we do hope is that this plan can get the housing market going and, of course, the broader economy. We will need a robust economy to get our deficit down.

Fiscal Issues Likely To Be Key In Republican Primary Debate

Considering recent developments, fiscal policy is likely to be the number one topic at tonight's debate in the race for the 2012 Republican presidential nomination, hosted at Iowa State University in Ames, Iowa just days before the much-ballyhooed Ames Straw Poll this Saturday. The S&P credit rating downgrade brought heavy criticism from candidates Michele Bachmann, Mitt Romney, and Jon Huntsman, but you can be sure that the debate will be filled with questions about how they would get us on the path back to AAA (at least with S&P).

As candidates debate tonight, and as they form their policy agendas in the coming weeks, we hope they look to be specific on fiscal issues. Candidates should offer concrete ideas for the deliberations of the Joint Select Committee on Deficit Reduction -- the special joint committee created under the debt limit deal that is tasked with finding $1.5 trillion in 10-year savings by the end of November. President Obama has said he will present his own ideas to the committee for how they can reach their savings target, and the Republican presidential candidates should look to do the same, offering detailed plans and policies that can help set our nation on a sound fiscal path. Generalities about cutting spending or platitudes about rolling back the size of government will not suffice.

Candidates should also explain how they intend to pay for any jobs creation programs, tax cuts, or other deficit-increasing proposals included in their policy agendas. We cannot afford to be digging ourselves a deeper hole.

Here are some of the key questions we think candidates should be ready to answer:

  • How would you recommend the special joint committee reach its goal of $1.5 trillion in savings?
  • How would you craft a plan to reach at least $4 trillion in deficit reduction in order to stabilize the debt and put our country on a stronger financial footing?
  • What are your priorities for the nation and how do you plan to pay for them?
  • How would you address unsustainable cost growth in Medicare and Medicaid?
  • How would you look to fix Social Security's financing gap?
  • What is your plan for the extension or expiration of the 2001/2003/2010 tax cuts, and how would you go about comprehensive tax reform?
  • How would you meet and build upon the savings enacted in the recently passed discretionary caps?
  • How would you reform the budget process to better promote effective and responsible budgeting?


Make sure to tune in tonight and keep an ear out for what the candidates are saying about their plans for fiscal policy. We know that it is not necessarily easy to lay out specific deficit reduction policies in the context of a political debate, but considering the events of the past few weeks and the events still to come later in the year, we expect more than general statements and cliches.


photo / Flikr user Gade Skidmore

Congressional Leaders Naming Appointees to Joint Committee

Updated to reflect House Minority Leader Nancy Pelosi's appointments.

Over the past several hours, congressional leadership has begun naming the lawmakers for the 12 member Joint Select Committee on Deficit Reduction, created as part of the recent debt ceiling deal. The debt deal stipulated that the appointees must be named within two weeks of passage, or August 16th. On Tuesday night Senate Majority Leader Harry Reid (D-NV) made his choices and yesterday Speaker John Boehner (R-OH) and Senate Minority Leader Mitch McConnell (R-KY) nominated theirs. Today, House Minority Leader Nancy Pelosi (D-CA) has made her choices. Senator Murray and Rep. Hensarling will be the co-chairs of the new committee.

The members are:

To recap: the special joint committee, made up of 6 Democrats and 6 Republicans, is tasked with finding $1.5 trillion in deficit reduction over the next ten years, or face a sequestration in 2013 of 50 percent defense and 50 percent domestic spending. The committee must agree on deficit reduction measures by a simple majority and recommend them to Congress by November 23rd, and Congress must vote on them by December 23rd.

As the recent debt downgrade from S&P signals, we are running out of time to address our long-term fiscal challenges. The special joint committee should at least double its target from $1.5 trillion in savings to no less than $3 trillion in order to stabilize and reduce debt as a share of the economy. The committee must focus on making fundamental reforms to slow the growth in Social Security, Medicare, and Medicaid spending while also revamping the tax code to improve efficiencies, fairness, and growth.

The committee has a huge opportunity over the coming months to help get the country on a healthy fiscal track. CRFB congratulates all the newly appointed members on their new responsibilities and wish them success in hopefully going beyond their mandate to truly control our mounting debt. 

Informative Tables from Tax Policy Center

Tax Policy Center has two sets of interesting tables that have just come out in the past few days. They offer some great information for those of you who are eager to brush up on your knowledge of the tax code.

The first set of tables show the parameters that TPC uses in their current law and current policy baselines. In effect, the tables shows what happens to tax rates, the AMT, and a whole host of other aspects of the tax code that would change if provisions from the 2010 tax cut extension were allowed to expire as scheduled (or were extended, depending on how you want to look at it). It is a great way for comparing the current law and current policy tax code side-by-side in an in-depth manner. Here is just a segment of what is a very large and detailed table:

You can click on the table for the enlarged version on TPC's website.

The second set of tables contain distributional tables for a whole host of tax preferences. A few mostly benefit low-income people, such as the Earned Income Tax Credit and the child tax credit, but unsurprisingly, many of them disproportionately benefit high earners, like the state and local tax deduction and the charitable deduction. This just goes to reflect our point that many tax expenditures, especially itemized deductions, are poorly targeted and regressive.

Between the many expiring provisions that cause confusion and uncertainty and the long list of inefficient and ill-targeted tax expenditures, it becomes clear that our tax system needs reform. As lawmakers debate changes that could help set our nation on a sound fiscal path, comprehensive tax reform that fixes a broken tax code should be one of the top items on their list.

CRFB Explains the S&P Downgrade

With the S&P downgrade of U.S. debt from AAA to AA+ on the books, CRFB has released a paper that goes into the credit rating system, the possible effects of the downgrade, and how other countries have fared in a similar situation.

We explain the reasons that S&P gave for the downgrade:

The downgrade was issued in part because of the country’s high level of debt and the failure of recent legislation to control it. More significantly, though, the downgrade resulted from increasing questions over the nation’s political capacity to enact further deficit reduction in light of the recent debate. 

In addition, the paper goes into the possible effects of the downgrade, while comparing how other countries have fared after being downgraded by S&P.

As S&P and Moody’s have both warned, failure to put our fiscal house in order could result in further downgrades in the next couple of years. In fact, of the 10 other countries that have lost their AAA rating, 8 have seen an additional rating downgrade, including 5 which never recovered their AAA rating. Among those who have recovered their rating, it took an average of about 13 years – the shortest being for Canada, which recovered the rating in just under 10 years.

Also, in order to analyze the data necessary for making the country comparisons, we have made a database that includes other countries' credit ratings (with S&P) and their debt statistics. You can view the Excel sheet here.

To read the full paper, click here.


A Roller Coaster Ride in Financial Markets

Who needs amusement parks when you can watch the volatility that is the stock market? Just a day after the Dow Jones posted its biggest one-day loss since the financial meltdown in 2008, the Dow bounced back with a 400+ point gain. In the middle of the day, there was the much-anticipated release of the FOMC's statement, which itself contributed to the up-and-down action.

There was much speculation that the Federal Reserve would announce a stimulative policy such as another round of quantitative easing or state that it would hold the size of its balance sheet constant for an extended period. Instead, the Fed held steady on policy, but announced that it would keep interest rates at their record low through mid-2013, rather than "an extended period." If the Fed decides to pull anything else out from its toolkit, you can track it at

However, the FOMC statement also stated that the economy had been performing more poorly than they expected, even as negative factors they had seen as temporary--such as increased food and gas prices--have subsided somewhat. The pessimistic outlook sent the Dow Jones tumbling a few hundred points (it had been over 100 points, but ended up down 100 after the statement). However, markets quickly recovered to push the Dow to plus-430 for the day by the closing bell.

Financial markets clearly have become unsettled by recent fiscal and economic developments. We know one thing that would help: a clear, comprehensive debt reduction plan to guide us to fiscal sustainability.


MY VIEW: John Tanner

In a new op-ed in Roll Call, former Congressman and CRFB board member John Tanner explains why America needs a centrist 'super committee.' Tanner writes that "[q]ualified Members should have a track record of bipartisanship, be devoid of ideological and inflammatory rancor, and be willing to roll their sleeves up and take some big risks," saying that we can not get to 'yes' if the members of the committee remain entrenched in partisan ideology.

We already have seen signs that party leaders will go to their bases in selecting the participants of the super committee — people who are hidebound to their ideological beliefs, loyal to the party line, politically unwilling or unable to cross the aisle for a common-sense solution. My prediction, if this is the decision by the leadership, is that this effort will be in vain and we all lose.

It doesn’t have to be that way. The super committee does not have to result in an ideological standoff that will bankrupt our great country and only serve to waste America’s time and patience, leading to future angst in an already unsettled market.

.... Our legislative leaders should take this crucial opportunity to throw partisanship out the window and appoint those in the sensible center to the super committee.


Click here to read the full commentary.


"My Views" are works published by members of the Committee for a Responsible Federal Budget, but they do not necessarily reflect the views of all members of the committee.

CRFB's Updated Realistic Baseline

With the Budget Control Act now in the books, it's time for us to update our CRFB Realistic Baseline from our projections a month ago. In addition to the discretionary spending caps contained in the legislation, we will also incorporate the effects of the final CR (which were excluded from CBO's Long Term Outlook and, thus, our original baseline).

To refresh your memory, our baseline contains a number of adjustments to current law that are very likely to occur. We assume that all of the 2001/2003 tax cuts are extended, the AMT is patched continuously, Medicare physician payments are frozen instead of cut by 30 percent (the "doc fix"), and the wars are gradually drawn down. Compared to a "current law" baseline, these policies (and the subsequent interest costs or savings) add an extra $3.6 trillion to the deficit over the next decade.

Based on this information, back in March, we concluded the deficits could total $10.3 trillion over the next decade, instead of $6.7 trillion.

The passage of the Budget Control Act, though, reduces that number somewhat. Compared to March, the new discretionary caps and spending cuts enacted in April should reduce deficits by $1.1 trillion over the next decade.

Bridge from Current Law to CRFB Realistic Baseline
  2012-2021 (Billions)
CBO March Baseline Deficits $6,738
Tax Cuts Extended and AMT Patched $3,820
Doc Fix Passed $298
War Drawdown -$1,134
Net Interest $620
March CRFB Realistic Deficits $10,342
April CR Cuts -$122
BCA Savings -$756
Net Interest -$183
Post-BCA CRFB Realistic Deficits $9,281

As a result of these changes, total deficits under our Realistic Baseline would be $9.3 trillion through 2021, compared to $10.3 trillion under our previous estimate. And debt as a percent of GDP would be 86 percent in 2021 as opposed to 90 percent.

New CRFB Realistic Baseline Deficits and Debt
  2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Deficits (% GDP) 6.7% 5.0% 4.2% 4.3% 4.6% 4.3% 4.3% 4.6% 4.8% 4.8%
Debt (% GDP) 73.2% 75.8% 76.8% 77.6% 78.9% 80.2% 81.4% 83.0% 84.7% 86.3%


Budget Control Act also includes a "Super Committee" to recommend $1.5 trillion in deficit reduction, with a $1.2 trillion trigger scheduled to cut spending automatically if the Super Committee or balanced budget amendment do not succeed. We do not include the success of the Committee or the activation of the trigger in our Realistic Baseline. Including the savings from the automatic trigger would bring the debt down to 80 percent of GDP in 2021. If, on top of that, the upper income tax cuts were allow to expire in 2013, this would result in roughly $800 billion of further defict reduction compared to our Realistic Baseline, bringing the debt down to 77 percent by 2021.

Even if the Super Committee succeeds or the automatic spending cuts take place and the upper-income tax cuts are either not extended or paid for, debt will still remain far above historical norms and will not be on a declining path. Clearly, we need to do more.