In a move much earlier than we expected, the Co-Chairs of the White House Fiscal Commission released their plan on how to get control of our national debt. The proposal is a drastic change from our current fiscal course and should be a document of great significance in the fiscal policy discourse. Before we get into specifics, we should point out that this is not the plan--14 out of 18 Commission members still have to agree to the recommendations.
In terms of the medium-term goal specified by President Obama of getting the deficit to three percent of GDP by 2015, the plan accomplishes that easily, reaching two percent of GDP. Over the next decade--or nine years since the plan doesn't start until 2012--the plan would save about $4 trillion relative to a current policy baseline. The deficit continues to gradually decline through 2040 (and presumably after that), reaching budget balance in 2037. The budget balance leaves both spending and revenue at roughly 21 percent of GDP, although spending appears to be declining over time.
Debt peaks at around 70 percent of GDP mid-decade but declines steadily from there. It is 65 percent of GDP in 2020, 52 percent of GDP in 2030, and 34 percent of GDP by 2040. Judging by the declining trajectory of debt over the long-term, it's safe to say that the proposal solves the long-term debt problem.
The plan does not spare any part of the budget--attacking discretionary spending, the big entitlements (including health care costs themselves) and other mandatory spending, tax expenditures, and offering different possibilities for tax reform. We'll go into the specifics of each part in later blogs.
The Co-Chair's plan is remarkable and a significant step towards sound fiscal policy. We would be thrilled to see a very similar plan presented next month by the Commission. Given the political constraints that they had to navigate, Co-Chairs Erskine Bowles and Alan Simpson are to be commended. As CRFB President Maya MacGuineas said in our press release,
In a period when there has been little good news on the deficits and debt front, this is truly a most encouraging sign. If this Co-Chair plan is meant to be a starting point, I'd say it would be a pretty terrific ending point.
Stay tuned for more analysis of the plan from CRFB soon.