Deficits and Debt

Op-Ed: Britain's Austerity: 4 Lessons For Washington

CNN Money | October 25, 2010

Commentary: Maya MacGuineas is the director of the fiscal policy program at the New America Foundation.

The Brits sure did mean it when they promised a tough fiscal austerity plan. Man, the difference between our two governments' ability to act when necessary is depressing. It sure would be nice to have a parliamentary system at a time like this.

The U.K. coalition government last week spelled out spending reductions that average 19% across all agencies over 4 years. That's 500,000 public-sector jobs. Little is spared. Housing benefits and education funds will be cut. Defense will be pared 8%. The cuts go on.

It remains to be seen whether this aggressive plan will be enacted as outlined, and how the U.K. economy will respond. But there are already a number of lessons for Washington.

Too quick a pace for U.S.
 
Prime Minster David Cameron's plan is structured to aggressively reduce the deficit over the next four years.

That schedule jibes with the time span for the U.K. parliament.

But given the state of the world economy and the need to balance stimulus and deficit reduction, such a short-term timeframe is too aggressive for the United States to follow. And we are lucky that, thanks to the dollar's "safe haven" status, we don't have to follow a tight time frame.

In fact, Britain's timeline highlights a flaw in President Obama's current approach: The White House fiscal commission is laboring under the goal of trying to eliminate the primary deficit by 2015. That goal too is too shortsighted. (Deficit cutting: The first cut is the deepest)

A more sensible plan would be to set a medium-term fiscal target to be achieved over about 10 years.

In the first few years we should focus more on "fiscally responsible stimulus," while also adopting a specific deficit reduction plan that can be phased in gradually as the economy recovers.

This is not the Krugmanesque model of giving lip service to the need for future budget changes with all the emphasis on stimulus now. Instead, we need a multi-year legislative agenda that includes specific stimulative and deficit-reducing policies.

The savings should kick in when the economy is strong enough. But Congress needs to commit to budget cuts in law as quickly as possibly -- or the markets just won't believe us.

On target: Go after spending
 
Thumbs up to the Cameron team for its aggressive tack on spending. Past experiences show that spending cuts tend to be better than tax increases for trimming deficits while generating strong economic performance.

We'll need to take a page from Britain here. The U.K. reductions in public sector employment are a useful model -- and we should emphasize wage freezes and compensation restructuring.

And while we talk timidly about freezing spending, we will need to think in terms of cuts as well.

The British government is also right to means-test where possible. For example, its decision to scale back the universal child credit for those on the high-end of the income scale is an excellent model for many of our universal programs, including Social Security and Medicare.

Footnote: Refreshingly, the Brits show none of the foolishness we do about promising to make changes without touching taxes. Their model suggests a sensible sequence: Cut spending first, then raise taxes as needed to close the remaining gap.

Tax pitfalls
 
I argue over and over that tax increases will have to be part of the budget solution. Still, I share many of the fears of the anti-tax crowd: A value-added consumption tax could become a money machine and temporary taxes will inevitably be made permanent.

And, yup, these fears are borne out in the Britain austerity plan.

Once a VAT is in place, the rates keep getting ratcheted up, as the Brits are doing now. If we do end up with a consumption tax in this country, we need to find a way not to turn it into an AMT.

Similarly, there's a good lesson for Congress in the Brits' plan to make their temporary bank tax permanent.

I support a temporary consumption tax to help with stimulus and close the fiscal gap. (Beware the VAT: Why the consumption tax is possible)

But any temporary tax needs to hit a broad swath of taxpayers so there's a big constituency rooting for its demise as soon as the fiscal ship is righted.

U.S. lawmakers need to focus on the big picture: Systemic budget reforms and a fundamental restructuring of the tax system.

Dramatically reducing tax expenditures and reforming the corporate tax code would serve as an excellent first step in enhancing efficiency and competitiveness while increasing revenues.

Political courage: If only ...
 
Finally, Cameron has shown real leadership in indicating that fixing the budget situation is worth risking losing office over. He is right. Would that a politician or two here in Washington be willing to show that kind of courage. 

Op-Ed: How To Avoid A Debt Doomsday

CNN Money | October 17, 2010

Commentary: Maya MacGuineas is the director of the fiscal policy program at the New America Foundation.

Here is a scary question: What could trigger a full-blown fiscal crisis in the United States?
 
OK, now breathe. It is not at all clear that we will have one. There is the highly desirable possibility that policymakers will act preemptively and gradually phase in major entitlement reforms, spending cuts and tax reform.
 
You know the old Winston Churchill saying that Americans can always be depended on to do the right thing -- after exhausting all other alternatives. Well, there's still time.
 
And then there is the scenario one step removed from a full crisis: a Japan-style "lost decade" situation in which the economy muddles along. Job growth is lackluster for an extended period. Low interest rates allow Washington to keep borrowing. And the country gets stuck in an ineffective borrow and stimulate cycle with little to show for it other than more debt.
 
If that muddle-along scenario is the frog in the boiling water, then a full-blown fiscal crisis is the frog hopping along the interstate until he abruptly becomes road kill.
 
A fiscal crisis would not be pretty. Creditors could lose faith and pull their money from the United States. Interest rates would spike, causing interest payments to grow. The government would be forced to borrow more, which would push rates even higher. The endgame would be a vicious debt spiral and another recession.
 
Yes, rates are now extremely low. But that's because, as one of my colleagues likes to say, "We are the best looking horse in the glue factory." It's not because anyone looks at our economy as the next great investment story. Because of that, things could change on a dime. (Take the CNNMoney debt quiz.)
 
What could trigger a worst-case scenario? Even if it's not likely to happen anytime soon, it's important to understand the possibilities.
 
Sovereign debt contagion: We have already seen how quickly markets can turn against overly indebted countries. While the United States is not likely to become Greece in the immediate future, the parallels are too similar for comfort.
 
The fact is debt investors eventually grow intolerant of countries that don't have plans to improve their fiscal condition.
 
And markets may eventually turn against the United States. If that happens, the situation could deteriorate very quickly. No money manager will want to be the last one invested in a place from which other investors are pulling their capital.
 
Ticking time bombs in the budget: The government runs all sorts of potentially risky and costly programs.
The Pension Benefit Guarantee Corp., Fannie Mae and Freddie Mac and the Federal Deposit Insurance Corp. are some examples. These agencies embody trillions of dollars in government obligations, and the full extent of the exposure is not well-known.
 
The dramatic deterioration in the balance sheet of any of these institutions could lead to a chain of events where markets conclude that the government is not as sound as they had previously believed.
 
The White House's fiscal commission: President Obama has shifted the responsibility for coming up with a deficit reduction plan to his bipartisan commission.
 
But there is no guarantee that Congress will do anything other than glance at the commission's recommendations and tuck them away. This could be the confirmation that U.S.-debt watchers fear -- that the political system is incapable of dealing with the country's fiscal challenges.
 

As the chairman of Standard & Poor's sovereign rating committee recently warned, it is critical that policymakers consider the recommendations of the commission or it could jeopardize our AAA credit rating.

The states: If the fiscal situation is bad at the federal level, it's even worse for many states. A state or even a local government attempting to default on its legal obligations could be enough to roil credit markets.

Just a few years back it would have been hard to imagine that talk of a full-blown U.S. fiscal crisis would be anything other than fear mongering. Now, however, these scenarios are starting to feel alarmingly possible. Let's hope Churchill was right. 

 

Op-Ed: Dear Congress: Don't Blow It On Bush Tax Cuts

CNN Money | October 12, 2010

Commentary: Maya MacGuineas is the director of the fiscal policy program at the New America Foundation.

Ahem. Excuse me, Congress? I don't mean to nag, but there are 58 more working days until the Bush tax cuts expire. Trust me, I get it: I always waited to cram until the night before the test. Still, shouldn't you get a move on?
 
I know there are a lot of possible combinations of tax extensions floating around. To help move things along, here are a number of options, ranked in order from best to worst.
 
Bingo! Fundamental tax reform
By far the best option would be an overhaul of the tax code.
 
No one needs to be convinced that our current system is a mess. It is outdated, overly complex, a drag on economic growth, and as leaky as an old fisherman's dingy.
 
There is really nothing to love there.
 
Reforms with the most potential:
 
  • close many of the more than $1 trillion in loopholes that permeate the code;
  • modernize the corporate income tax so we don't stifle business with one of the highest marginal tax rates in the world;
  • shift away from taxing income toward taxing consumption;
  • and replace some of our less desirable taxes such as the payroll tax with a broad-based energy tax.
This will take some fortitude. For example, those "loopholes" include things we all love like the home mortgage interest deduction or the tax break for state and local taxes, not just pernicious corporate welfare which is so easy to oppose.
 
And even though Sens. Judd Gregg and Ron Wyden have a bipartisan bill that could serve as a solid starting point, and former President Bush's tax commission issued a report chock full of good ideas, getting this done in 58 days is a tall order. This one may have to come later.
 
Next best: Let cuts expire but enact temporary stimulus
The economic argument for keeping the tax cuts in place, even in the face of immense fiscal pressures, is that now is not the time to pull so much liquidity out of the economy.
 
True. However, these tax cuts are not particularly stimulative.
 
A better option would be to let all the tax cuts expire, but use the money they would have cost over the next two years for more targeted and effective stimulus measures -- such as unemployment benefits, aid to states, a payroll tax cut, business incentives or more help for the weakest sectors such as housing.
 
All told, such an approach would cost roughly $350 billion over the next two years, but save almost $3 trillion over the decade. And, importantly, it would surely do at least twice as much good for the economy.

Hold your nose: Temporary extension
 The political compromise many are leaning toward is extending some or all of the tax cuts temporarily and then deciding what to do.
 
Yes, punt.
 
This approach could be useful if it came with an ironclad commitment not to extend the tax cuts again without combining them with a full-fledged budget reform deal or a pledge to offset their costs.
 
Of course, the risk is that they just become another Alternative Minimum Tax patch or Medicare "doc fix." These supposedly "temporary" budget maneuvers actually cause budget mayhem year after year as policymakers enact last-minute extensions with no budgetary offsets.
 
In terms of particulars, extending the tax cuts only for those making less than $250,000 is preferable to extending them all, and would save around $100 billion over two years. (I refuse to call this the middle class, because really, since when did the 98% percentile become the middle class?)

A one-year extension is too short if we want to get even some stimulative effect, but if they end up being extended for all income levels, it's worth staggering them so that tax cuts for the wealthiest expire after one year and the rest do after two or three years.

Don't fall for it: Extend cuts temporarily for all making less than $1 million
This is one of those compromises that makes you want to say, "just stop already." It's the kind of slippery slope policymaking that happens too often in Washington. Soon we'll be hearing about extending all the tax cuts except specifically those for Bill Gates and Warren Buffett.
 
For sure, we need to address the country's growing income inequality problem. The tax code and spending side of the budget should be more progressive. But we can't just lump all the responsibility for paying taxes on a few hedge-fund types. The government needs more revenue, and everyone has to be part of the solution.

No! No! No! Permanent extension
Don't do it. We can't afford it. It will make climbing out of the fiscal hole we are in nearly impossible.
 
It is absurd that there's even a debate. Extending all of the Bush tax cuts will add $3.7 trillion to the debt, and extending them for those making less than $250,000 a year will add $3 trillion.
 
So what will Congress do? My bet is on a two-year temporary extension for all of the tax cuts -- or maybe three years to get us through the next election.
 

But hope springs eternal: I am not giving up on fundamental reform.

 

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. http://budgetreform.org/document/budget-blueprint-paths-60-percent
 
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. http://crfb.org/stabilizethedebt/ (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

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