A Thousand Cuts...

The Center for American Progress released a paper yesterday titled "A Thousand Cuts." The paper aims to show how deep policymakers would have to cut spending to reduce the deficit to primary balance in 2015--the equivalent of finding about $255 billion in savings in the year 2015.

As we said yesterday, the paper presents five budget scenarios for achieving primary balance: 33 percent spending cuts, 50 percent spending cuts, 67 percent spending cuts, 100 percent spending cuts (without tax expenditures), and 100 percent spending cuts (with tax expenditures). The spending reductions are specified while the gap is filled in with unspecified revenue increase.

The following summary table shows the amount (in billions) that their specific proposals would cut in 2015 alone.

Scenario 1 focuses on tax expenditure reduction and defense cuts. It saves $10 billion by eliminating the deduction for business meals and entertainment, $12 billion in troop reduction in Europe and Asia and $25 billion in defense overhead that would otherwise be used to offset additional spending. Scenario 2, closing 50 percent of the gap through spending reductions would build on that by including a $6 billion cut in military compensation and a full ($13 billion) repeal of the exception from passive loss rules for $25,000 of rental loss. The 3rd also includes $9 billion more in cuts from the exclusion of interest on private purpose bonds and $7 billion in additional Federal Highway Administration cuts, and layers on new cuts in non-defense discretionary, including reductions in environmental and conservation related programs.

The 4th scenario has large cuts for many spending areas such as a 75 percent cut in agricultural subsidies and $12 billion from Social Security (by indexing COLA to an improved measure of inflation). There are cuts to 15 different tax expenditures, $96 billion in defense cuts and a full 2.5 percent decrease in non-defense discretionary spending. Of note, however, is the lack of Medicare and Medicaid reductions which CAP states is due to the cuts already in place in the recent health care reform act.

The last scenario drops the $53 billion in savings from tax expenditures. This scenario eliminates the Build America Bonds program ($12 billion) and state grants for rehabilitation services and disability research ($3 billion), reduces defense spending by an additional $14 billion, $2 billion from housing assistance, $600 million from children and families service, completely eliminates the Universal Service Fund ($5 billion more), $13 billion more from the Federal Highway Administration and another $1 billion from the Federal Aviation Administration.

Keep in mind that in the first three scenarios, the goal is not reached through spending cuts alone. Thus, in order to fully reach the overall budget goal under these scenarios, revenues would have to be increased by about $170 billion in the first scenario, $127 billion in the second, and $85 in the third. Moreover, since this is done from the President's budget, this assumes that the 2001/2003 tax cuts for upper-income earners would expire, meaning that the additional needed revenue would have to come from another source. One must also recognize that these revenue numbers and the spending cuts examined by CAP are only for 2015, meaning additional cuts/revenue enhancers would be needed for each additional year.

Lastly, the fifth scenario is indicative of what many policymakers say when they want to reduce the deficit, but not touch revenue.

Regarding the magnitude of the spending cuts in the 3rd, 4th, and 5th scenarios, John Podesta, founder of CAP, stated that:

"We believe that cuts this severe would eviscerate the foundation for future growth and do lasting harm on the health of the American middle class."

We also believe that a more balanced approach--one that includes both spending reductions and revenue increases--represents the most viable solution to controlling our rising debt.

This is an incredibly useful exercise and we applaud CAP for putting forth such a detailed analysis of different approaches to cutting spending. Click here to try to cut the debt yourself.