Today marks the fifth anniversary of the National Commission on Fiscal Responsibility and Reform's (Fiscal Commission's) vote on the Simpson-Bowles plan, in which 11 out of 18 commissioners voted to support an ambitious plan to reduce 10-year deficits by $4 trillion (relative to a "current policy" baseline) by addressing virtually all areas of the budget and tax code.
Despite several rounds of negotiations in 2011 and 2012, Congress and the President unfortunately never agreed to a "grand bargain" of the scale or scope proposed by the majority of the Fiscal Commission. Yet substantial deficit reduction has been enacted through a piecewise approach; by our estimate, those measures (excluding legislation which has increased deficits) have totaled to over three-fifths of the deficit reduction the Simpson-Bowles report called for between 2012 and 2020. Unfortunately, these savings have come largely from near-term cuts in discretionary spending and not from gradual pro-growth tax and entitlement reform which the Fiscal Commission proposed in order to achieve long-term sustainability while promoting short- and long-term economic growth.
Indeed, according to our estimates, lawmakers have enacted nearly 130 percent of the defense and nondefense discretionary cuts proposed by the Fiscal Commission through 2020. Yet they have generated less than one-third of the revenue and done so entirely through higher rates rather than pro-growth tax reform. And they have enacted only one-sixth of the savings to mandatory programs, which represented a small share of the Fiscal Commission's savings through 2020 but grew over time and was the key to long-term fiscal sustainability. (See our methodology below for more information about the calculations.)
In other words, lawmakers have largely failed to address the nation's most pressing fiscal challenge: the large and growing cost of Social Security, Medicare, and Medicaid.
The IMF has released new research showing that fiscal reforms enhance economic growth. These findings are broadly consistent with other analysis of this topic, including work from the Congressional Budget Office (CBO) that showed that a sensible deficit reduction plan could boost per-person income in 2040 by $4,000 relative to our current course.
Examining past reform episodes in nine countries, the IMF report finds that economic growth was around 0.75 percentage points higher per year on average in the decade following the reforms for advanced economies, and 2.5 percentage points higher per year for emerging market or low-income countries. Separate analysis of growth acceleration episodes confirms this positive impact, with higher growth more likely to occur following fiscal reform. Packages that included both revenue and spending reforms lead to faster growth in 60 percent of the cases examined and were also more likely to spur growth than ones that changed only one or the other.
The Peterson Foundation's Solutions Initiative III produced five different fiscal plans that would improve the current long-term budget outlook. We have already gone over the topline numbers for the plans, but another important aspect is how they get to those numbers. Below are four takeaways from the policies that the plans propose.
Consensus on the Gas Tax
Lawmakers will have to find a way to fund the Highway Trust Fund in the next few months, and one of the possible solutions that has gained popularity with the current relatively low gas prices has been raising the gas tax. Four of the five plans - the American Action Forum (AAF) being the exception - proposed increasing the gas tax by a significant amount. The American Enterprise Institute (AEI) would increase it by 11.7 cents and index it to inflation, the Bipartisan Policy Center (BPC) would increase it by 15 cents and index it to inflation, and the Center for American Progress (CAP) and Economic Policy Institute (EPI) would increase it by an unspecified amount. AEI's and BPC's increases would fully close the trust fund shortfall through 2025. We also proposed increasing fuel taxes by 9 cents in our plan The Road to Sustainable Highway Spending.
No One Likes the Sequester
The sequester will be a big deal in the coming months when lawmakers will have to decide the level of spending for appropriations. The President's budget would repeal most of the sequester for FY 2016, while the Congressional budget would leave the sequester in place but provide backdoor sequester relief for defense through the war spending category. A notable theme in the think tanks' plans is that all of them propose some form of sequester relief, and three of them would provide sequester relief to both defense and non-defense. The only plans that left the sequester in place were AEI's for non-defense spending and EPI's for defense spending. Clearly, none of the plans were satisfied with the tight caps that the sequester prescribes, although they varied on how much to lift them (AEI stood out in particular on defense, while EPI had much, much higher non-defense caps). Although these plans do not make changes to the budget until FY 2017, their approaches can be instructive for lawmakers for FY 2016.
The Peter G. Peterson Foundation (PGPF) hosted its 2015 Fiscal Summit today, which brought together leading lawmakers and policy experts to discuss the nation's economic and fiscal challenges. Part of the agenda was the "Solution Initiatives III," where five think tanks – the American Action Forum (AAF), the American Enterprise Institute (AEI), the Bipartisan Policy Center (BPC), the Center for American Progress (CAP), and the Economic Policy Institute (EPI) – presented their ideas to improve the nation's finances and prioritize different programs. As the title indicates, this is the third time PGPF has had think tanks present fiscal solutions after previous rounds in 2011 and in the run-up to the fiscal cliff in late 2012.
In contrast to current projections, which have debt rising continuously starting later this decade to over 100 percent of Gross Domestic Product (GDP) by 2040, the plans would all either stabilize debt at about its current level or put it on a clear downward path. AAF is the most aggressive, getting debt down from 74 percent of GDP this year to 16 percent by 2040. CAP, EPI, and AEI also put debt on a downward path to 46, 54, and 63 percent, respectively, while BPC stabilizes debt at about its current level.
The International Monetary Fund recently published a study on budget institutions in G-20 countries. The study takes stock of these countries' progress in reforming their budget institutions and examines whether having strong budget institutions has helped countries tackle their budget challenges in the aftermath of the financial crisis. While it is difficult to measure the impact of institutional arrangements on budgetary outcomes, the IMF's verdict is that they do matter.
A new report from the Center for American Progress argues that roughly 60 percent of the sequester should be waived in light of the savings from the fiscal cliff deal in January, which allowed taxes to rise on the top 1 percent or so of Americans.
The Campaign to Fix the Debt has recently released the results of a new national telephone poll that found broad support for a comprehensive deficit reduction plan that includes tax reform, sequester replacement, and structural changes to Social Security and Medicare. The bipartisan poll was conducted by Anzalone-Liszt-Grove Research and Voter Consumer Research with 800 likely voters.
Although talks between the White House and Senate Republicans now appear to be in hiatus, a few interesting articles have offered new insights into what they were trying to accomplish. Among these tidbits, a mysterious savings target -- $518 billion -- has emerged with many folks unclear where that number came from.
Today, a piece in the Financial Times shows the unnecessary damage being done by the ongoing sequester -- in this case, sharp cuts to federal support for low-income housing.
A New York Times piece today lays out a possible "mini-bargain" to move past the debt ceiling and expiration of government funding.