If You’re Going to Rely on Savings Targets, Specify the Baseline

As CRFB has certainly been making clear, we would prefer a "big deal" that dealt with all areas of the budget and reduced debt as a share of the economy. But given the time constraints and the need to raise the debt ceiling, we’ve also argued that a two-step process with strong enforcement mechanisms could be the next best way to achieve a sustainable debt path. If lawmakers go with the two-step process that requires and enforces certain savings, how you measure those savings matters.

The Boehner proposal calls for $1.8 trillion in deficit reduction to come out of a joint congressional committee made up of 12 members -- but there has been some confusion about what the savings in Speaker Boehner’s proposal would be judged against, given that the legislation doesn’t specify which baseline it uses. However, by remaining silent and directing CBO to estimate the savings that come out of the joint committee’s recommendations under normal procedures, the Boehner proposal appears to require the committee’s recommendations be scored against CBO's current law baseline, which assumes expiration of all the 2001/2003/2010 tax cuts as well as no AMT patches or “doc fixes.”

As a result, a potential tax reform proposal which could result in $800 billion more revenues than a current policy baseline (in which all tax cuts are extended, and which was reportedly agreed to in the Obama and Boehner negotiations that broke down) would not count as deficit reduction. In fact, CBO would score such a proposal as increasing the deficit given that revenues would be lower than under current law.

However, targeted tax changes that do not address the expiring tax cuts one way or another, such as elimination of specific tax preferences or new taxes, would count as deficit reduction. Using a current law baseline for measuring savings would also allow the committee to claim savings from limits on OCO spending that take credit for the troop drawdown already in place, which CRFB has already described as a gimmick.

Reid's proposal would avoid the question of baselines and what savings would be counted by giving the joint committee the goal of reducing the deficit to 3 percent of GDP. However, the Reid proposal does not say when that goal would be achieved. It is also unclear whether the committee could achieve that goal by remaining silent on items such as the AMT, the “doc fix”, and by taking credit for the additional revenues and spending reductions assumed in the baseline, even though Congress would still need to deal with those issues.

In order to get beyond the baseline confusion and the potential for gimmicks to artificially inflate savings, CRFB supports debt-to-GDP targets and corresponding savings targets to ensure that legislation actually achieves the goal of reducing our debt as a share of the economy.

In the past, we have recommended that lawmakers institute a debt-to-GDP target of 60 percent by the end of the decade. The very minimum goal of any debt plan should be to stabilize the debt and put debt on a declining path by the end of the decade, as the National Commission on Fiscal Responsibility and Reform recommended. In addition, the plan should either be required to explicitly address expiring provisions or achieve the debt targets assuming they are extended in their current form.