There has been a lot of talk about revenue levels under Paul Ryan's "Roadmap for America's Future" recently. Not only from us (here, here, and here) and Congressman Ryan, but also from the Tax Policy Center (here, here, and here), the Center on Budget and Policy Priorities (here and here), the Heritage Foundation, E21, the New Republic's John Chait, and others.

Although many observers (including TPC and CBPP) contend that Ryan's Roadmap would not raise the amount of revenue he has claimed, the intentions of Ryan's plan are clear -- to bring the debt under control without increasing taxes relative to current policy (or beyond 19 percent of GDP for that matter).

Based on these revenue targets, Ryan's plan would balance the budget around 2060, and eliminate the debt by 2080. But it accomplishes this goal only through dramatic spending cuts -- and, problematically, only after first letting debt held by the public hit upwards of 100 percent of GDP. Although a tremendous improvement from current policy (and even current law), this level of debt is dangerous, and would leave us little fiscal flexibility over the next several decades.

As we've said before, it may be too late to control the debt through spending cuts alone.

But what if Representative Ryan were a little less strict about his revenue limits? According to our calculations, small increases in revenue, combined with the Congressman's spending plans, can make a big difference.

If we enacted the Roadmap spending plan, but let revenues remain as under current law (including letting all the Bush tax cuts expire and ceasing to patch the AMT), debt would begin to fall in only a couple of years. By 2025, it would decline to 50 percent of GDP, by 2040 it would drop to 30 percent, and by 2050 it would be gone altogether.

Of course, under current law taxes will increase significantly -- to 26 percent of GDP by 2080. But what if we instead capped taxes at 20 percent of GDP? Above the historically average, but below the record levels under President Clinton. In that case, debt would hold steady around 60 percent of GDP through 2040, drop to 40 percent after 2050, and disappear soon after 2060.

Even under the tax plan in President Obama's budget, which renews most of the Bush Tax Cuts and continues to patch the AMT, debt would peak at 70 percent of GDP and be eliminated by 2065.

The bottom line is that, if accompanied by Congressman Ryan's ambitious spending plan, a little bit of revenue can make a big difference in terms stabilizing the debt. This is especially true if Members of Congress find themselves unwilling to cut spending by the levels Mr. Ryan has proposed.

That said, it is quite clear that revenues cannot be all or even most of the long-term solution. The Tax Policy Center has already shown the massive (and perhaps untenable) income tax increases which would be necessary just to get us through the next decade. But what if we didn't rely on rate increases alone? What if we reduced tax expenditures, implemented an energy tax, etc?

Well we did a little thought experiment. Congressman Ryan showed the spending levels necessary to eliminate the debt (by 2080) under current policy revenue levels (capped at 19 percent of GDP). So we tried construct a "reverse roadmap" which raised the necessary revenue levels to meet Congressman Ryan's annual debt targets, assuming current policy spending.

Our findings are unfortunate for those who think we can maintain our current spending path. To simply keep up with Ryan's Roadmap -- which still means letting debt rise to 100 percent of GDP -- revenues would have to rise from a historical average of 18.1 percent of GDP, to 22 percent in the early 2020s, 24 percent by 2030, 30 percent by 2050, and 40 percent by 2080. In other words, would have to more than double as a share of the economy.

That's certainly a roadmap to somewhere -- but probably not a place this country should or can go.

On Monday, Moody’s Investor Service released its quarterly report (courtesy of Zero Hedge) on government debt held by large countries with the highest bond rating (the Aaa rating): France, Germany, the United Kingdom, and the United States (with notes on Spain and the Scandinavian countries). Moody’s and the other bond rating agencies have warned for months that the bond rating of a country could drop if governments do not begin to pay more attention to their burgeoning debt. While Moody’s notes that there is “no imminent rating pressure for Aaa Governments,” the risk of a downgrade continues to climb. Moody’s argues that:

• Growth alone will not resolve an increasingly complicated debt equation. Preserving debt affordability at levels consistent with Aaa ratings will invariably require fiscal adjustments of a magnitude that, in some cases, will test social cohesion.
• Tightening fiscal policy before private demand has become self-sustaining would involve the risk of putting growth on an even lower trajectory, thereby damaging a government’s main asset: its power to tax.
• Postponing fiscal consolidation much longer is no less risky as it would test the patience of the market – and of central banks. Although Aaa governments benefit from an unusual degree of balance sheet flexibility, that flexibility is not infinite. At the current elevated debt levels, a rise in the government’s cost of funding can very quickly render debt much less affordable – and potentially exert more abrupt pressure on the ratings.

Rather than looking at the debt-to-GDP ratio as the primary factor for assessing the potential for a government to lose its Aaa rating, Moody’s suggests another measurement: the ratio of annual interest payments required to maintain a government’s debt to its annual tax revenues. Moody’s argues that “debt affordability” is a better measure because how much flexibility a government has for other spending is determined by its past debt accumulation.

Moody’s emphasizes that there is no specific marker (although 10 percent is a marker that could be a warning sign) that would generate a downgrade of a country’s rating, rather the rating is subject to the debt affordability measure and the debt reversibility measure (a government’s ability to reverse the debt trend). In fact, Moody’s emphasizes this point, the rating "hinges on the credibility of the long-term fiscal adjustment plans” of a government and a country’s willingness to undertake fiscal consolidation.

We would only do so if we came to the conclusion that either the government was unable to restore affordability to a level consistent with an Aaa rating (the circumstances that led to Ireland’s downgrade in July 2009) or that the government chose to live with a permanently higher debt burden. Debt reversibility therefore provides a measure of the extent to which we would give a government the benefit of the doubt, if its finances were stretched but we believed its determination to correct the situation was unequivocal.

So, how does Moody’s assess the likelihood of a downgrade in the U.S. rating? According to Moody’s assessment of the debt projections in the Administration’s FY 2011 budget, the debt affordability measure would rise to nearly 18 percent by 2020 (roughly the rate from the 1980s, although Moody’s notes that the ratio then was due to high interest rates, rather than the size of the debt). If that measure actually reached those levels, Moody’s estimates that “there would be at some point be downward pressure on the Aaa of the federal government.” And while Moody’s notes the establishment of a fiscal commission, it argues that “the politics of actually implementing such reforms remain uncertain.”

Congressional GOP leaders have just named three Senators and three Congressman to sit on the National Commission on Fiscal Responsibility and Reform, established by the President in mid-February to reduce the deficit to a sustainable level by 2015 (see CRFB's previous discussion of the Commission here).

Senate Republicans chose Senator Judd Gregg (NH), Senator Mike Crapo (ID), and Senator Tom Coburn (OK), while House Republicans chose Congressman Paul Ryan (WI), Congressman Dave Camp (MI), and Congressman Jeb Hensarling (TX). House Democrats have yet to name their appointments to the Commission.

Named members now include:

• Eskine Bowles (Democratic Co-Chair)
• Alan Simpsons (Republican Co-Chair)
• Alice Rivlin (Presidential Appointee - Democrat)
• David Cote (Presidential Appointee - Republican)
• Andy Stern (Presidential Appointee - Democrat)
• Ann Fudge (Presidential Appointee - Democrat)
• Kent Conrad (Senate Democrat)
• Max Baucus (Senate Democrat)
• Dick Durbin (Senate Democrat)
• Judd Gregg (Senate Republican)
• Mike Crapo (Senate Republican)
• Tom Coburn (Senate Republican)
• Paul Ryan (House Republican)
• Dave Camp (House Republican)
• Jeb Hensarling (House Republican)

See our previous commentary on the Commission:

Press Release – Joint Statement on the National Commission on Fiscal Responsibility and Reform

Obama Appoints Four More to the Deficit Commission

Democrats Named to Deficit Panel

CRFB, Concord, and CED Commend Commission

Obama Establishes Deficit Commission

Erskine Bowles and Alan Simpson to Lead Deficit Commission

Today a new bipartisan caucus was announced to support passage of H.J. Res.1, a balanced budget constitutional amendment. The co-chairs are Representatives Mike Coffman (R-CO) and Jim Marshall (D-GA) and founding members are Representatives Bob Goodlatte (R-VA) and Mike McIntyre (D-NC).

H.J. Res. 1 directs the President to submit a balanced budget to Congress annually. It also prohibits annual outlays (except for repayment of debt principal) from exceeding receipts (except those derived from borrowing); a three-fifths vote of each chamber would be required to waive the requirement for a specific expenditure. A three-fifths vote would also be required to increase the public debt limit. Any bill increasing revenue would require a majority roll call vote in each chamber for approval. Waivers would be allowed in times of war or other circumstances involving military conflict. The bill currently has 175 co-sponsors in the House.

If ratified, the amendment would take effect the later of the second fiscal year beginning after its ratification or fiscal year 2016. The preliminary CBO analysis of the President’s FY 2011 budget estimates an $894 billion deficit that year, which is the gap that would have to be erased in order to balance the budget. That would force the kind of difficult decisions that Washington has been unwilling to make.

At a press conference launching the caucus its leaders stressed the need to address rising budget deficits in a bipartisan manner. Goodlatte stated that the “public is focused on this issue above all others” and that it is the top issue expressed by his constituents. The members displayed a chart with recent figures from the CBO on the rising debt-to-GDP ratio in the President’s FY 2011 budget to make their case for addressing the debt.

Coffman said that the amendment would “force us to make the tough decisions” regarding budget priorities, such debate over priorities is currently lacking in Congress according to the Congressman. Marshall used the example of the current health care bill, arguing that if lawmakers were compelled to focus on the cost issue in health care, they would be more motivated to find solutions.

There was also much talk of how running up debt will adversely affect future generations. Goodlatte said that inaction on tackling the debt is “kicking the can down the road – kicking it towards our grandchildren.” Marshall added that this generation has a moral obligation to future generations to act.

All expressed optimism that the significant hurdles to enacting a constitutional amendment could be overcome. They noted that similar amendments received the required 2/3 majority in the House in 1995 and 1997 while falling just one vote short of that threshold both times in the Senate. Marshall expressed optimism that the required 3/4 of states would ratify it “within a year.” All but one state has a balanced budget requirement for state budgets.

The Blue Dog coalition also recently unveiled a balanced budget amendment. CRFB welcomes the focus on the need for budget discipline and addressing mounting deficits and debt. These proposals move the debate towards getting specific about stabilizing the debt and developing a credible fiscal plan, which needs to happen now. As Coffman said today, we risk a financial meltdown if we don’t act.

Ireland, like other European Union nations including Spain, Portugal, and Greece, risked losing the confidence of its creditors when it did not have a strategy to get its fiscal house in order after taking on massive debt to rescue its economy and financial system over the past few years. 

Last year, Ireland faced the same fiscal problems that Greece faces now (with the exception that Ireland was hurt by the formerly high flying housing market and “bad” banks).  Investors demanded a high risk premia and credit ratings agencies downgraded Ireland’s sovereign debt, based on rising fears that Ireland could not manage its fiscal accounts.  Investors worried that the country would have to turn to inflation to finance its debts.  Some thought in the worst case that Ireland might default on its debt and the cost of insuring against that default rose significantly.  But the Irish government acted. It developed tough budgets that included significant cuts to government spending and raising additional revenue.   

This wise action has not been without pain.  Government cuts have hurt public services and public servants and the government has faced high disapproval ratings (see Wall Street Journal, March 10, 2010).  But as the Wall Street Journal reported, there has also been an upside.   Despite still facing high deficits and debt, the cost of insuring against an Irish default has shrank and is much lower than the similar cost for Greek debt (Greece fails similar problems but has been slow to implement budgetary changes). 

The United States should follow the Irish example (and those of other countries who have undertaken fiscal turnarounds (see CRFB paper on fiscal turnaround success stories) Developing a credible plan to address a nation’s debt can assuage investors’ fears about default and fiscal policy.   The United States has the luxury and flexibility of avoiding the harsh and quick cuts that Ireland had to make and can wait until the economic recovery has firmly taken hold.  But to buy some breathing room that Ireland did not have (and that Greece may have lost), the United States must show its creditors that it is serious about stabilizing the federal debt over a reasonable timeframe. 

Legislation from Senators Jeff Sessions (R-AL) and Claire McCaskill (D-MO) to establish discretionary spending caps may get a third vote this week in the Senate after falling one vote short of the needed 60 votes last week. The bipartisan proposal seems to be gaining momentum after getting 56 votes in January during the debt ceiling increase debate.

The sponsors have made some slight changes in order to attract more support. The bill will institute caps for fiscal years 2011 through 2013 and allows exemptions for emergency spending with a 3/5 vote. It is now being offered as an amendment to the FAA Reauthorization bill.

CRFB supports spending caps, which in addition to PAYGO can introduce much-needed fiscal discipline in Congress. Even though discretionary spending is less of a budgetary threat than mandatory spending, it has grown faster than entitlements over the past decade. Controlling discretionary spending will be essential to reducing the federal debt.

Let’s hope the perseverance of Sessions and McCaskill pays off with one more vote for fiscal responsibility.

A month and a half ago, Representative Paul Ryan (R-WI) released his "Roadmap for America's Future," a detailed plan to reform taxes and spending, and ultimately address our long-term debt problems in full. The CBO score of the proposal found that it would significantly improve our current debt path, and eliminate the debt in its entirety by 2080. As CRFB and others praised the plan, however, some have argued its assumptions may be unrealistic -- particularly on the tax side.

On February 4th, the Tax Policy Center's (TPC's) Howard Gleckman pointed out that CBO did not in fact truly score the revenue effects of the Roadmap. As he explained (emphasis added):

As specified by [Congressman Ryan's] staff, for this analysis total federal tax revenues are assumed to equal those under CBO’s alternative fiscal scenario (which is one interpretation of what it would mean to continue current fiscal policy) until they reach 19 percent of gross domestic product (GDP) in 2030, and to remain at that share of GDP thereafter.

[we] asked CBO to analyze the Roadmap’s long-term revenue impact and CBO declined to do so because revenue estimates are in the jurisdiction of the Joint Tax Committee (JCT).  JCT does not currently produce revenue estimates beyond the traditional 10-year scoring horizon.  Based on consultations with the Treasury Department and other tax experts, the Roadmap’s tax rates were formulated to produce revenues equivalent to the current tax code.

Source: Tax Policy Center

The tax reforms proposed and the rates specified were designed to maintain approximately our historic levels of revenue as a share of GDP, based on consultation with the Treasury Department and tax experts.  If needed, adjustments can be easily made to the specified rates to hit the revenue targets and maximize economic growth.

Regardless of where you fall in this debate, Rep. Ryan deserves a lot of praise for putting out a detailed plan to deal with the exploding long-term debt.  Very few lawmakers have proposed specific ways to deal with our debt, and Ryan has a plan to significantly curb the cost of entitlement programs and eventually bring the debt under control.  But there is one lesson from this exercise -- large tax cuts (at least compared to current policy) are probably off the table for good, if we are serious about getting our fiscal house in order.

Though Ryan did not intend to do so, TPC and CBPP show that cutting taxes by about 2 percent of GDP (relative to current policy) would drive the debt to astronomical levels -- even assuming the extremely large (and extremely brave) spending cuts proposed by the Congressman.

Congressman Ryan is certainly right that "we simply cannot chase our unsustainable growth in spending with ever-higher levels of taxes," but there is a corollary. We don't appear to be able to chase our continued appetite for tax cuts with the necessary cuts in spending -- and we can't continue to finance them through borrowing.

To get our debt under control, both taxes and spending will have to be on the table. Representative Ryan deserves all the praise in the world by taking the first step, and putting forward a real and honest plan to move forward. If others want to criticize his plan for raising insufficient revenue or cutting spending too traumatically, that is fine. But it is time for them to put forward sustainable alternatives.

We look forward to seeing them.

This week, the New York Federal Reserve announced the beginning of a new Reverse Repurchase Agreement Program to reduce some of the liquidity in financial markets. Under the program, the Fed will sell securities from it's portfolio -- but with an obligation to repurchase them at a later date. This is an additional sign of tightening from the Fed, in light of last month's increase in the discount rate from 0.5 to 0.75 percent.

The New York Fed originally announced this program back in October in an operating policy statement, stating that they had been working internally on the operational details of repurchases and reverse repurchases to make it a viable option if the FOMC decided such a program should be used. In the statement, the Fed also announced that reverse repos are nothing new and have even "been in the Federal Reserve's toolkit for years, and the Federal Reserve has conducted them both as recently as December 2008."

The New York Fed said that the reverse repurchase agreements will initally focus on firms that provide the largest amounts of short-term funding -- namely, primary dealers and domestic money market mutual funds -- but intends to eventually broaden the pool to more participants.

Even though this can be interpreted as a method of tightening, the Fed's statement yesterday maintained that the announcement of this program should not affect expectations on any other monetary policy moves. The program will indeed reduce some liquidity in markets, but is unlikely to have any significant impact.

CRFB has incorporated this program into the list of Fed programs, created to address the economic crisis, on Stimulus.org.

In a blog post yesterday, Donald Marron discussed an additional way for governments to ease budget pressures along with traditional spending cuts and tax increases. Dr. Marron noted that governments can also sell some of their assets (a proposition that is getting increasing international attention -- the focus of a Washington Post Op-Ed this morning -- in light of several German lawmakers' suggestion last week that Greece sell some of its assets).

Dr. Marron highlights that the government owns almost three trillion in assets; but while many of these -- such as government buildings and Navy ships -- are not sellable, the government owns hundreds of billions worth of financial assets.

Let's see how much the government could earn by selling some of these more notable assets...

The Financial Report of the U.S. Government shows us that the U.S. government owns $2.7 trillion in assets, up from just $2 trillion last year. These assets can be broken down into cash, international monetary assets, loans, mortgage-backed securities, and stocks. The CBO also reports the potential 10-year savings from selling portions of several agencies.

^{Sources: Financial Report of the U.S. Government, CBO Budget Options: August 2009, author's calculations.
1 Ten-year cost savings for selected sales taken from CBO Budget Options, and reflect savings between 2010 and 2019.
^ The Financial Report show the government's holdings of gold equaling $11.1 billion as of September 9, 2009. However, as Donald Marron pointed out, this number assumes that the 261,498,900 ounces of gold is valued at the statutory price of $42.2/ounce. On March 9, 2010, the value of gold was over 26 times greater at $1,118/ounce, bringing the current value of these holdings to over $292 billion.
# Includes savings of $60 million a year in related costs and projects between 2013 - 2019.}

The table above shows that the U.S. could earn over $600 billion by selling some of its many assets. Asset sales would not necessarily change the "net liabilities" of government (as we discuss here), but would reduce the debt. Yet, sales of this type would be one-time fixes to our country's annual deficits and would not change the unsustainable fiscal trends we now face. 

We aren't advocating for such asset sales -- we're just trying to show how much the government could save by doing so. Marron notes that many U.S. government assets, such as stewardship and heritage sites, haven't been given dollar values, nor should they. But in the immense pile of assets the government owns - we agree with Marron that there have got to be some sellable assets in there somewhere.

See our list of previous Deficit Challenges:

• Contestant #1 in Our Spending Challenge
• TPC Takes Tax Challenge with Income Rates
• Deficit Challenge by Cancelling Stimulus Spending
• What About Education Cuts?