Deficits and Debt

Maya MacGuineas Testimony Before the Fiscal Commission

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Testimony of Maya MacGuineas
President, Committee for a Responsible Federal Budget
Director, Fiscal Policy Program, New America Foundation
Before the National Commission on Fiscal
Responsibility and Reform
July 28, 2010
Chairman Bowles, Chairman Simpson, members of the Commission – thank you very much for the opportunity to appear before you today.
I am the president of the bipartisan Committee for a Responsible Federal Budget and the director of the Fiscal Policy Program at the New America Foundation. I also am part of the Peterson-Pew Commission on Budget Reform and a member of the Domenici-Rivlin Debt Reduction Task Force.  Today, I will discuss a number of the outside initiatives that are underway to try to help change our nation’s fiscal future.
I know that all the members of this commission have been working incredibly hard scouring all areas of the budget for potential reforms to improve our fiscal future, and I thank you for all the effort that you are putting into this task.
If we don’t make changes to our debt trajectory, we will pay a heavy price through a weaker economy, a lower standard of living, less growth potential, a less flexible budget, and a loss of leadership in the world.
Just yesterday, the Congressional Budget Office released a report on federal debt and the risk of financial crisis. The document not only warns that debt levels are already quite high compared to historical levels, but that the debt is set to grow faster than the economy—forever. Future debt growth will be driven by higher government spending caused by the aging of the populating, escalating healthcare costs, and the biggest waste in the budget – spiraling interest payments (my words, not the ever-diplomatic CBO’s), and revenues that, even though they will be higher than historical averages, will not be high enough to pay for all the spending.  
The CBO report focuses on the growing risk of a fiscal crisis if we do not change course. A crisis could take the form of a gradual rise in interest rates.
Or as we have seen in other nations, it could be startlingly abrupt, as investor concern suddenly grows over the risk of default or attempts to inflate our way out of our fiscal problems.  No one knows at what point we would hit the tipping point. The Committee for a Responsible Federal Budget recently held an entire conference with some of the world's top financial and economic experts on the topic of what would cause a fiscal crisis and what exactly it would look like. There was nothing close to a consensus about what would kick off a crisis—only that we may well be dangerously close to finding out and that we’d rather not. Fears like these –which would have seemed so exaggerated in the past—now are disturbingly relevant.
Other than how much we should not want to find out what a fiscal crisis would look and feel like, there are a few main points I want to make today:
  • We need fiscal goals for both the medium and long term
  • We have to be cognizant of the sluggish economy as we proceed
  • We should focus on policies that will help grow the economy
  • Along with important work of the Fiscal Commission, there are many outside the group trying to develop ideas that will help lay the groundwork for, and dovetail with, whatever the commission comes up with.
I’ll focus on the Peterson-Pew Commission on Budget Reform, the National Research Council and National Academy of Public Administration’s “Choosing the Nation’s Fiscal Future,” and the still in-progress Domenici-Rivlin Debt Reduction Task Force.
By way of background, The Peterson-Pew Commission on Budget Reform is sponsored by the Peter G. Peterson Foundation and the Pew Charitable Trusts and its Members are those of the Committee for a Responsible Federal Budget—all the former directors of CBO and many of the formers heads of OMB, the budget committees and the Fed.
Last December the Commission released a six-step plan to stabilize the debt including: 
Step 1: Commit immediately to stabilize the debt
Step 2: Develop a specific and credible debt stabilization package as quickly as possible
Step 3: Begin to phase in policy changes gradually in 2012;
Step 4: Review progress annually and implement an enforcement regime to stay on track;
Step 5: Stabilize the debt by 2018; and
Step 6: Continue to reduce the debt as a share of the economy over the longer-term.
The National Academy of Sciences/National Academy of Public Administration study was funded by the Macarthur Foundation. The co-chairs were John Palmer of Syracuse University and Rudy Penner, former CBO director, now with the Urban Institute. It was tasked with showing different comprehensive policy packages, reflecting different values, all of which would return the U.S. to a sustainable path.
Finally, the Domenici–Rivlin Debt Reduction Task Force hosted by the Bipartisan Policy Center is still at work. The groups is co-chaired by former Senate Budget Chairman Pete Domenici, and Alice Rivlin, formerly head of CBO and OMB, and vice chair at the Fed.
The Task Force is equally split between Republicans and Democrats—as well as a few Independents, of which I count myself as one. It will focus on debt reduction and stabilization. And our starting point is that everything is on the table. The report will be released this fall.
There also are many important outside engagement efforts as well, including the Concord Coalition and Dave Walker of the Peterson Foundation ’s “Fiscal Wake Up Tour,“ which holds Town Hall meetings across the country with the Heritage Foundation and the Brookings Institution, and the recent multi-city town hall hook-up convened by America Speaks. But I have been asked to focus on the outside policy and process efforts underway rather than engagement efforts.
We Need Both Medium and Long-term Fiscal Targets
In terms of a fiscal goal, it is actually quite remarkable how regularly US policymakers craft budgets without a specific goal in mind. It is like flying blind, yet the budget process does not require a goal or target to be the starting point of the process.
A fiscal goal has the advantage of helping policymakers say no, as in “I’d love to give you that shiny new spending program or that alluring targeted tax cut, but it will keep us from achieving our fiscal goal.”
It also allows us to make comparisons. For instance, say there is one politician courageous enough to lay out the specifics of how he or she would fix the budget. Without a goal, others can criticize the plan without offering a productive alternative. But if you have a common fiscal target, if you don’t care for those policies, you can show a different plan that achieves the same goal and allow a fair comparisons of the pros and cons of each approach. It helps bring back the basic notion of trade-offs to budgeting.
This commission has its specific goals which have been laid out for it, which focuses on the short-term target of 2015, and a more vague longer term objective. Specifically:
The Commission shall propose recommendations to balance the budget, excluding interest payment on the debt, by 2015. This result is projected to stabilize the debt-to-GDP ratio at an acceptable level once the economy recovers. In addition, the Commission shall propose recommendations to the President that meaningfully improve the long-run fiscal outlook, including changes to address the growth of entitlement spending and the gap between the projected revenues and expenditures of the Federal Government.”
The Peterson-Pew Commission has recommended a medium-term goal of stabilizing the debt by 2018 at 60%--a well-recognized international standard, which is important given the emphasis we must put on reassuring global credit markets. The Fiscal Future Committee, also chose this goal, with 2022 as the target year. And the Domenici-Rivlin commission has not settled on a specific goal, and nothing is decided until everything is decided, but some type of medium-term debt target appears to be likely.
Recently, the International Monetary Fund has pointed out that the goal cannot just include stabilizing the debt at post-crisis levels, but rather, must involve bringing it down to pre-crisis levels.
To achieve such a medium-term goal, all three commissions agree that a reasonable plan would be: Credibly commit to reforms as quickly as possible, and phase them in gradually in order to avoid derailing the economic recovery.
But this will not be enough. In order to reassure credit markets and help strengthen the economy, a longer-term plan also will have to be adopted to control federal spending, close the gap between spending and revenues, and alleviate the current uncertainty that confuses citizens and creditors about the direction of future fiscal policy.
Over the longer-term, Peterson-Pew also strongly advocates further gradually reducing the debt relative to the economy – closer to the historical average of below 40%– after 2018. The Fiscal Future Committee recommends policy changes to ensure that “revenues and spending are closely aligned”. The primary reason, other than economic, is to ensure that we have the fiscal flexibility in the future to respond to crises that inevitably will rise.
Both medium-and long-term fiscal targets are critical. They also may well require very different policies, with the medium term changes relying more on savings from discretionary programs—including both defense and domestic discretionary—and revenue changes, including everything from cutting tax expenditures to fundamental reform. The Wyden-Gregg plan is certainly one good place to look for ideas.
Both groups point out that in the longer-term, the bulk of reforms will have to come from programs related to the drivers of spending growth—the aging of the population and soaring health care costs—primarily government health care and retirement programs. Simply put, without changes in these areas of the budget, the debt cannot be stabilized.
These policy conclusions are borne out by the types of policies in The Fiscal Future Committee report as well as the illustrative budget blueprint developed for the Peterson-Pew Commission to show one way we might achieve the debt goal. They reflect the general desire by policymakers to make changes more gradually to entitlement program to allow people time to adjust, as well as the reality that that is the area of the budget where the long-term unsustainable growth comes from.
This is particularly relevant to the mission of this commission whose mission is to balance the primary deficit by 2015 which is assumed will stabilize the debt once the economy recovers. This will only be true if you address the unsustainable drivers of budget deficits; otherwise, the budget will again fall out of balance. 
I would emphasize that though both medium- and long-term fiscal targets are needed, the exact target is far less important than coming up with significant improvements that show that we have the ability to change course and avoid the fiscal calamity we are otherwise headed for.
We all are aware of the political polarization that exists in this country, and one of the major concerns is that the two parties will not be able to work together to develop a fiscal roadmap to get us out of this mess. I hope this Commission proves doubters wrong. If this commission comes up with either a modest, or far better, a significant plan, it will go a long way toward reassuring our creditors that we will fix this situation before we are forced to.
I believe it is the hope of all the outside commissions that they will help pave the way to getting there by offering specific ideas and approaches.
Balancing Economic Recovery and Fiscal Consolidation
There are legitimate concerns that enacting a fiscal consolidation plan prematurely could derail the economic recovery. It is my personal belief that the economy still faces many challenges and that well-crafted stimulus measures – and I emphasize that – are in order—though I should state that my board of directors has mixed views about this.
However, we are now also experiencing the loss of fiscal flexibility that comes with high debt levels. Instead of just borrowing for stimulus, we should add stimulus measures as necessary and offset the costs of the measures over a longer period of time, so that the funds—whether for unemployment insurance, state and local governments, or business tax incentives—do not lead to more debt over the longer-term.
This also does not mean that there is no room for some tax increases or spending reductions this year or next if they affect areas that are not particularly stimulative.  Allowing the tax cuts for the well-off to expire for instance, or cutting wasteful or ineffective programs out of the budget, is unlikely to harm the recovery while cutting unemployment insurance, aid to states or raising payroll taxes probably would. Removing non-stimulative programs is more likely to aid the recovery by showing markets that we are indeed serious about making the changes we need to the budget. A down payment on a full package will be very important in reassuring markets and the public—which will help improve consumer confidence.
Importantly, just committing to a credible fiscal consolidation plan right now, even if the policies are not phased in for a few more years, can help the recovery. The so-called “Announcement Effect” can reassure investors and help keep interest rates from rising as they otherwise might due to all the debt, as the economy starts to recover. We have seen this in other countries, such as Denmark and Ireland in the past.
For these reasons again, both the Peterson-Pew and the Fiscal Future Committee recommend committing to changes immediately, while actually implementing them more gradually. Given where the economy was at the time the reports were produced, both recommended phasing in very small changes starting in 2012, with the savings growing quickly each year thereafter as the economy strengthens.
The question is:  What would constitute a credible commitment?  It will take more than a promise.
For a plan to be credible, and for our creditors to buy it, it will have to be statutory, specific, bipartisan, and transparent to public. It should be put in law immediately with the policies slated to phase in as gradually as necessary. The specific policies in the plan must be developed now, not just filled with magic asterisk. The plan has to be bipartisan. The necessary policy changes  will be too difficult if either party tries to do this alone. Moreover, if something is pushed through by one party alone, and is met with calls to repeal it, it will undermine confidence that the plan will stay in place. Finally, the public has to understand the plan, be on board, and hold politicians accountable for staying on track. This kind of public commitment has been very helpful in other countries.
One look at the levels of debt we now face should remind all of us that the current favorable interest rate environment could change at any moment and investors could turn on a dime. Stimulus is easy – it involves tax cuts and spending increases – the stuff politicians like.  It is the reverse—the fiscal consolidation part—that policymakers do their best to avoid and that is one of the many reasons all these outside groups are pushing that it not be sidelined even as the economy recovers slowly.
Specific Policy Ideas
Moving on to specifics, The Fiscal Future Committee developed four illustrative paths that would achieve its goals.
The low spending and revenue plan would maintain revenues at traditional levels and rely on large spending cuts to all areas of the budget. It would shift responsibilities to households and state and local governments. It would balance Social Security by increasing the retirement age, progressive price indexing, and changing COLAs. And it would limit excess health care cost growth to aging of population. Investments would probably be detrimentally low in this option.
The high spending and revenue plan would only restrain growth of Medicare and Medicaid spending slightly, maintain currently scheduled Social Security benefits, and permit expanded spending on defense and other domestic programs. It would require very substantial increases in revenues. The Commission thus looked at alternative tax structures, including a radically reformed income tax that limits many tax expenditures and consolidates tax rates, and a VAT. It also assumed a dramatic increases in payroll taxes.
Between these two, the commission provides two intermediate paths, which fall between these two “bookends”.
The Domenici-Rivlin Task Force is still working, and again nothing is decided until everything is decided, but I can say the Task Force will recommend a specific set of reforms with the goals of:
  • Making Social Security solvent for 75 years
  • Reigning in growing health care costs
  • Limiting growth in other entitlement programs, including reforms to civilian and military retirement and farm programs
  • Looking at possible freezes in discretionary spending
  • Dramatically simplifying the tax code and considering a range of other revenue options
Last month, when I appeared before the Commission, we were asked to provide specific ideas for reducing the deficit. I submitted a plan, which represents my own views, not necessarily those of my board members. It is not presented as the perfect plan, but hopefully as a helpful example of the types of policies that will be necessary to reach a credible target. (Appendix 2)
The Peterson-Pew Commission also developed an illustrative plan of how to stabilize the debt at 60% by 2018, which can be found here.
Some of the major policy conclusions of the groups so far include:
  • Entitlement growth will have to be controlled
  • You can not get to any reasonable goal without new revenues
  • All discretionary spending – including defense -- will have to be part of a plan
  • Fundamental tax reform is desirable, and even more so if and when revenues go up.
In developing specific proposals, the groups also recognize and acknowledge the need to deal with the black holes in the budget – the policies that are different in the budget than they will be in reality. So for instance, these groups – or any developing a budget plan – have to deal with fixing the AMT and the Sustainable Growth Rate once and for all. The expiring tax extenders that also are always renewed have to be addressed. I would assume this commission should hold itself to that same standard and deal directly with these parts of the fiscal challenges, as well as not assuming new policies assumed to expire that really are not intended to.
The Importance of Economic Growth
This budget challenge cannot be viewed as an exercise in merely getting the numbers to add up. We have to be conscious of the most important national priorities, and the effectiveness of government activities.
And we have to pay particular attention to the economic effects of various policy choices. Economic growth will not be able to fix our fiscal problems, but without it, they will be ever so much harder to solve. Our current budget—fraught with short-termism—over-emphasizes consumption and under-invests. We tax the things we want more of—like work—and less of the things we want less of—such as pollution.
There is plenty of room for improvement along with rebalancing. Cutting out wasteful, inefficient and redundant programs is an obvious first step. Shifting our spending from consumption to investment-based programs will have medium-and long-term benefits for the economy. Fundamental tax reform—with a strong emphasis on broadening the base by reducing tax expenditures, will be essential.
So where do we go from here? The Domenici-Rivlin group plans to release our report this fall. I dare say it will be full of specific policies that reflect the kinds of tough choices we have to make to set the country on a better path.
Peterson-Pew is now working on a companion proposal, to be released this fall. In this volume, we will focus on a number of budget process changes including instituting fiscal targets committed to by both the White House and Congress, along with annual debt targets to provide a glide path to the stabilization goal. Additionally, we will recommend a long-term target that will bring the debt down further, yet be flexible enough to accommodate economic cycles and emergencies.
The commission is leaning towards an enhanced use of automatic budgetary triggers which would be used to keep policymakers on track in coming up with budget plans to meet their fiscal goals and then staying on track once they are in place.
And finally, the report will include a number of improvements to the budget process to make the process more transparent to 1) reduce short-term budgeting, 2) highlight budget trade-offs, and 3) improve fiscal outcomes
I will end by saying there are an infinite number of ways to achieve the fiscal goals we are examining. The Committee for a Responsible Federal Budget has developed a Stabilize the Debt simulator as part of the Peterson-Pew effort, which allows people to pick the policies they would use to get there. (I have brought each of you your own personal simulator you can play in your office.) The results have been gratifying. People are willing to make the tough choices. We are tracking the results to share with policymakers and the public, and there are 35 options –totally about $600 billion in savings in 2018, that have received over 50% support. Not bad.
The point is that the requisite changes are large and tough. But the public appears willing to make them. Thus while the task before this commission is incredibly hard, and ironing out the different values and priorities of the members is a true challenge, voters appear ready to sign on, and it is without question what we have to do for the sake of the future economic well-being of the country.  
All of the outside groups I mentioned today—as well as many others—stand willing to assist in any way we can. You have been given a large, and exceedingly important task. Given our debt trajectory, developing a plan to address it is the single most important thing we must do to assure the long-term strength of our economy and well-being for future generations. Thank you for your work on this important task.

Click here for an appendix to the testimony

CBO's Long Term Budget Outlook

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While CBO's debt projections have improved under the Extended-Baseline scenario, debt has worsened under the Alternative Fiscal Scenario. But under either path, debt reaches unsustainable levels. CRFB argues that policymakers should act immediately to put in place a credible plan to stabilize the debt gradually as the economy recovers.

CRFB Reacts to CBO's Long Term Outlook

Bill Frenzel
Tim Penny
Charlie Stenholm

Maya MacGuineas
Barry Anderson
Roy Ash
Charles Bowsher
Steve Coll
Dan Crippen
Vic Fazio
Willis Gradison
William Gray, III
William Hoagland
Douglas Holtz-Eakin
Jim Jones
Lou Kerr
Jim Kolbe
James Lynn
James McIntrye, Jr.
David Minge
Jim Nussle
Marne Obernauer, Jr.
June O'Neill
Paul O'Neill
Rudolph Penner
Peter Peterson
Robert Reischauer
Alice Rivlin
Charles Robb
Martin Sabo
Gene Steuerle
David Stockman
Laura Tyson
Paul Volcker
Carol Cox Wait
David M. Walker
Joseph Wright, Jr.

Elmer Staats
Robert Strauss

CRFB Reacts to CBO's Long Term Outlook
June 30, 2010

Today, the Congressional Budget Office (CBO) released its Long Term Budget Outlook, which paints an alarming and dismal picture of the country’s fiscal future.

Under current law, public debt will reach 79 percent of the economy by 2035 and about 107 percent by 2080. Under CBO’s Alternative Fiscal Scenario, which is seen to be a more likely policy path and includes the extension of many expiring policies as well as modifications to certain savings assumptions that may not materialize, debt will reach 87 percent by 2020, 185 percent by 2035, and an astronomical 854 percent by 2080. Talk about unsustainable.

CBO also reports that even with health care reform, population aging and excess cost growth remain the largest problem areas in the budget and will push deficits and debt to untenable levels.

If current policies are continued, federal spending is projected to increase from 24.3 percent of GDP today to over 35 percent by 2035, whereas revenue levels will be far from sufficient to sustain the projected growth in spending—increasing from 14.9 percent today to 19.3 percent in 2035.

“Aging, health care costs, and an outdated, insufficient revenue system are set to bury the country in debt,” said CRFB president Maya MacGuineas. “Are the findings in this report really the messages we want to be sending our creditors?”

“Policymakers must begin working on real solutions to our long-term problems now,” said MacGuineas. “With debt levels expected to soar, policymakers must embrace meaningful reforms to help us regain control over future deficits, reduce the risks of a fiscal crisis, and keep the economic recovery on track. If this year’s Long Term report isn’t a call to action, I don’t know what is.”


Click here for a pdf version of this release.

For press inquiries, please contact Kate Brown at (202) 596-3365 or


Op-Ed: Can We Afford $100 Billion Jobs Bill?

CNN | June 4, 2010


Last Friday, the House passed and sent to the Senate a jobs bill that was scaled down in an effort to control the cost.

The American Jobs and Closing Tax Loopholes Act, which was originally projected to cost around $190 billion, would still cost more than $100 billion and add roughly $50 billion to the deficit. This does not include the tens of billions that will be part of a supplemental spending measure, which will deficit-finance war spending and other "emergency" measures.

That's a lot of borrowing to add to a debt that already exceeds $8 trillion. It raises a host of questions. Does the economy need measures to help with job creation? Are these the best measures? Should they be paid for or simply added to the deficit?

Obviously, the unemployment rate is still far too high. Although there are pockets of growing employment and other encouraging economic signs, job growth will likely lag during the recovery. As the unemployment rate hovers close to 10 percent and families struggle to deal with the potentially devastating effects of sustained joblessness, efforts to ease the pain are indeed warranted.

The problem is, no clear-cut way exists to use federal dollars to promote sustainable job growth. The House bill includes an extension of unemployment benefits, a bump-up in slated federally funded physician payments, and an extension of some expiring tax breaks. Would this create a host of shiny new jobs? Unlikely.

Unemployment benefits are in order because they help struggling families, although criticisms that they may prolong unemployment by reducing incentives to look for work are not unfounded.

The inclusion of the "doc fix" -- or the patch to the slated reductions in physician reimbursement rates -- is certainly not a credible policy to create jobs, but rather an example of muddying up important legislation with unrelated items. Further, the doc fix, a long-standing problem, should have been addressed as part of health care reform. So although a jobs bill makes sense, it is hard to argue that this one holds much hope for doing much to improve the employment situation.

Nonetheless, this bill is the one we've got. If that is the starting point, then should it be paid for? There are those who argue that adding the cost of the bill to the deficit, rather than paying for it, would create more stimulus, which is what the economy needs right now.

Frankly, many of these pro-stimulus arguments are made more for political reasons than for economic ones. There are plenty of members of Congress running for re-election who want to offer more benefits and tax cuts, but few who want to pay for them. So the stimulus label comes in quite handy.

So far, to control costs, certain measures have been dropped from the bill -- such as extending Medicaid benefits to the states and providing COBRA subsidies -- and the cost has been lowered by shortening the period over which the doc fix would apply. But Congress may well choose to make many of these changes later, so this is more kicking the can down the road instead of making the necessary hard choices.

Instead, those who support the bill should be willing to pay for it. As moderate Democratic Rep. Stephanie Herseth Sandlin of South Dakota said, "We need to pay for our priorities, and that principle doesn't just apply only when it's easy -- it's especially important when the decisions get tough."

It would be fine to borrow to provide more stimulus now as long as the cost of the bill was paid for over a longer period of time -- say, five years. Demonstrating that we are serious about fiscal responsibility as well as economic stimulus would be the best way to boost the economy and reassure credit markets that the U.S. remains a good place to lend for the long term. If instead we continue to pile up too much debt, it could cause our creditors to balk, pushing up interest rates and choking off the very recovery we are trying to foster.

There are an infinite number of ways to offset the costs of the measures in the bill. For instance, unemployment benefits could be financed by instituting a short-term freeze on federal pay -- something that would be reasonably fair given that as wages have fallen in most of the economy, federal workers have continued to see their salaries rise faster than inflation.

Similarly, we could offset the cost of the doc fix by strengthening the new Medicare commission, which was part of health care reform, by allowing it to make recommendations that affect more parts of the health care system, including hospital payments, participant costs and government health subsidies, and directing it to find additional savings.

As the bill moves to the Senate, some are already trying to water down the existing offsets such as the increase on the taxation of carried interest, which eliminates a loophole that allowed hedge fund and private equity firm partners to pay lower income tax rates than ordinary wage earners. This is exactly the opposite of what is needed.

From here on out, the name of the game has to be paying for added spending in one area by spending cuts in other areas. We cannot afford to add more to the national credit card -- an irresponsible approach to budgeting that will weaken the economy over time and do nothing in the effort to create sustainable job growth.

Copyright 2010, CNN

Essay: Our Unsustainable Budget Situation

NIHCM Foundation | May 2010


Our Burgeoning Federal Debt

There is little doubt that the United States is on an unsustainable budget path. Budget projections made by the Congressional Budget Office (CBO) have consistently anticipated an explosion in federal non-interest spending, fueled by rapid growth in Medicare, Medicaid and Social Security spending due to rising health care costs and an aging population. The directors of the CBO and the Government Accountability Office, the Social Security and Medicare trustees, and many other budget analysts have been sounding the alarm on this front for years.1 These warnings have not, however, resonated widely with the public or policymakers. Policy inertia has been the rule.

Now, of course, the problem has become much more immediate. The large budget deficits run up during the economic expansion earlier this decade and the even larger deficits used to combat and resulting from the “Great Recession” have the federal debt climbing to uncomfortable territory. Last year, the federal budget deficit was an eye-popping $1.4 trillion, or almost 10 percent of Gross Domestic Product (GDP). While the deficit situation will improve somewhat as the economy rebounds, deficits will still average well over a half-trillion dollars annually for the rest of the decade, adding continually to federal debt. Our country’s debt burden is quickly expected to reach levels not seen since World War II (Figure 1).

CBO projections show the public debt growing from $5.8 trillion in 2008 to $8.8 trillion in 2010 and climbing to $15 trillion in 2020.2 Total debt, which includes what the federal government owes to the Social Security and other trust funds, is expected to grow from roughly $13 trillion in 2010 to almost $21.5 trillion by 2020. These numbers are so large as to be almost unfathomable.

As troubling as this scenario is, it is almost certainly too optimistic since the CBO projections assume current law is adhered to. If the 2001/2003 tax cuts are not allowed to expire for all taxpayers as scheduled at the end of 2010 or if policymakers continue their routine “patching” of the Alternative Minimum Tax so that millions of Americans don’t have to pay the tax, then CBO’s federal revenue projections will be overstated. Likewise, if Congress again steps in to prevent the large drop in Medicare physician fees dictated by the sustainable growth rate formula, federal outlays for Medicare physician payments will be considerably higher than assumed. Discretionary spending also may grow much faster than the rate of inflation assumed by the CBO.

More likely assumptions show the cumulative deficits between 2011 and 2020 will be $12.4 trillion – twice as large as officially projected. Public debt would reach 100 percent of GDP in 2020. Beyond 2020, without changes, the situation would get far worse. CBO’s current law projections are quite bad, but numbers based on more plausible assumptions are devastating.3

The Harm of Excessive Debt

Borrowing money is the natural response to an economic slowdown, and the added government spending can help to offset lower consumer spending and stem job loss. But excessive debt can push up interest rates, slow wage growth, erode living standards, and deprive the nation of the fiscal flexibility to respond to future crises and new national priorities as they arise. More than half of our total debt, and the vast majority of our new debt, is held by foreign investors – giving our foreign creditors increasing leverage over U.S. policy, both domestically and abroad. With the federal debt about to expand dramatically, the risks of doing nothing are unacceptably high for the American taxpayer. We are also laying an exceedingly heavy burden on future generations who will eventually have to pay for today’s borrowing.

The Policy Response to Date

In his FY 2011 budget proposal, the President has proposed that the 2001/2003 tax cuts be allowed to expire for families making over $250,000 a year, a three-year freeze for all non-security discretionary spending, and reducing or eliminating a number of tax preferences. These are all steps in the right direction, but given the magnitude of the challenges we face, they are baby steps at best. New CBO analysis predicts the proposed budget will add $9.8 trillion, or 5.2 percent of GDP, to the national debt over the next 10 years. This projection was produced just before the final passage of the health care reform legislation and incorporates rough rather than precise estimates for the small savings expected from health reform.

The Administration also proposed the goal of having non-interest spending equal to revenue by 2015, which will require reducing deficits to roughly 3 percent of GDP. However, the spending and tax plan in the proposed budget would reduce the deficit only to $752 billion in that year, or 3.9 percent of GDP.4 The Administration is counting on the newly appointed bipartisan Commission on Fiscal Responsibility to trim the deficit by the final 1 percent of GDP, or almost another $200 billion, needed in order to reach its 2015 fiscal target. The panel must issue its recommendations by December 1, 2010. Recommendations require approval by 14 of 18 Commission members, guaranteeing bipartisan support but also setting a high threshold for action.

In addition to the obvious question of whether the Commission will succeed, one can ask whether its fiscal goal is sufficiently aggressive. Their current goal will bring the deficit down quite slowly and still leave the federal debt at close to 70 percent of GDP, well above historical levels.

An Alternative Proposal

In December 2009, the Peterson-Pew Commission on Budget Reform called on policymakers to set a bold yet reasonable goal: stabilize the debt at 60 percent of GDP by 2018.5 Around this same time, three other groups put forth similar proposals, setting debt-to-GDP targets of 60 to 70 per cent and end dates between 2019 and 2022.6 The Peterson-Pew Commission adopted a six-step plan to return the nation to fiscal health:

Commit immediately to stabilize the debt at 60 percent of GDP by 2018. A credible commitment now to stabilize public debt over the medium term can help to reassure our creditors and financial markets. The 60 percent debt threshold is both reasonable and consistent with international standards identified by the European Union and the International Monetary Fund. A more ambitious target could easily prove too difficult for lawmakers to accept and strains credibility. A less aggressive target might be insufficient to reassure markets.

Develop a specific and credible debt stabilization package in 2010. Congress and the White House must then quickly agree on the necessary reforms – almost certainly a mix of spending cuts and tax increases – and the timing for implementing them. Achieving the stated debt reduction goal will require average deficits of 2 percent over the implementation period, but the changes can start more gradually to avoid stalling the economic recovery.

Begin to phase in policy changes in 2012. The timeline for implementing agreed-upon changes must balance the risk of unduly aggressive changes that hamper recovery against delays that undermine the plan’s credibility and needlessly perpetuate high deficits. While the Commission currently believes economic conditions will favor new policies in 2012, policy makers need to watch conditions closely to determine exactly when to start making changes.

Review progress annually and implement an enforcement regime. Once a plan is adopted, we need a mechanism to ensure that it stays on track. The Commission recommends automatic triggering of spending cuts and tax increases any time an annual debt target is missed. This “debt trigger” should be punitive enough that lawmakers are encouraged to be fiscally responsible but not so large that they would try to override it if targets are missed.

Stabilize the debt by 2018. Reducing the debt to 60 percent of GDP will require a dramatic deviation from the current debt path. While the task will be much easier if we stick to current policy and do not extend expiring tax cuts without paying for them, significant structural changes to the budget will be needed regardless.

Continue to reduce the debt as a share of the economy over the longer-term. As we move to a longer-term perspective we will have to find ways to reduce the debt even below the midterm target of 60 percent of GDP. A more reasonable long-term target is something closer to the U.S. historical fifty-year average of less than 40 percent. Debts at this level would give the federal government the fiscal flexibility to respond to unexpected events such as the economic crisis we just experienced.

Moving Boldly Forward

Policymakers face an immensely difficult and unpalatable task. But as daunting as it will be to develop a plan to put the debt on a sustainable course, there simply is no other option. Action to set the changes in motion must begin right away.

The biggest factor in whether our country will succeed is political will – leaders will need to act together and courageously make very tough choices. Promises to not raise certain taxes or reduce certain benefits only stand in the way of bringing politicians together to develop a realistic plan. Any meaningful effort to address the budget problems will have to be bipartisan, giving both parties political cover and reinforcing the collective will to act. Our debt should not be our destiny. The time to act is now.


1 See, for example, Walker, DM. “Facing Up to America’s Health Care Challenge,” NIHCM Expert Voices essay series. 2008. publications/expert_voices

2 Congressional Budget Office. “The Budget and Eco - nomic Outlook: Fiscal Years 2010 to 2020,” 2010.

3 Committee for a Responsible Federal Budget. “CRFB Analysis of CBO’s January 2010 Baseline,” 2010. 80%99s-january-2010-baseline

4 Budget of the United States Government, Fiscal Year 2011,

5 Peterson-Pew Commission on Budget Reform. “Red Ink Rising, A Call to Action to Stem the Mounting Federal Debt,” 2009. Red_Ink_Rising_hyperlinked.pdf

6 Committee on the Fiscal Future of the US. “Choosing the Nation’s Fiscal Future,” 2010; Center for American Progress. “A Path to Balance,” 2009; and Center on Budget and Policy Priorities. “The Right Target: Stabilize the Federal Debt,” 2010.


Copyright 2010, NIHCM Foundation

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