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The Next Act: Further Deficit Reduction Must Include a Mix of Revenues and Spending Cuts

January 2, 2013 at 6:22 PM

The revenue increases in the new budget deal (the American Taxpayers Relief Act, or ATRA), coupled with the large cuts in discretionary spending that policymakers enacted in 2011, will achieve more than $2 trillion in deficit reduction over the next ten years.  That’s a substantial amount, but it’s not enough to stabilize the country’s debt as a share of the economy over the decade ahead.  To reach that goal, policymakers will need to produce about $1.2 trillion in additional revenue increases and spending cuts.

President Obama has said that future deficit reduction should come through a balanced mix of revenue increases and spending cuts; as a first step, he required that ATRA’s two-month delay in scheduled across-the-board budget cuts (“sequestration”) be offset with an even split of revenues and spending reductions.  By contrast, some Republicans leaders have indicated that they will push to achieve the additional deficit reduction entirely through spending cuts, with no further revenue increases at all.

The President’s approach is the sound and equitable one.  If this Republican view holds, then when all of the deficit reduction efforts are tallied together, spending cuts will outpace revenue increases by nearly 5 to 1 — hardly a balanced approach.  If future deficit reduction comes through an even split of revenues and spending cuts, total spending cuts will still outpace revenue increases by nearly 2 to 1.  (These ratio estimates do not include the effects of interest savings; if those savings are included, the share of savings that come from spending cuts rises further.)

Congress has passed various major pieces of deficit-reduction legislation since 2011:

  • Several pieces of legislation, culminating in the 2011 Budget Control Act, reduced spending on discretionary programs — for both non-defense and defense programs — by $1.5 trillion over the 2013-2022 period.  All of these savings are on the spending side.
  • The ATRA includes $563 billion in revenue increases. (This cost is relative to the revenues that would have been collected if policymakers had extended all expiring income and estate tax cuts, net of other tax changes in the law including the cost of continuing the so-called tax “extenders” through 2013).  The bill contains no significant net reduction in spending.
  • These policy changes together will yield roughly $300 billion in interest savings that will accrue because the debt will be smaller.

In November, we estimated (taking into account the enacted discretionary savings) that it would require about $2 trillion in additional deficit reduction through 2022 to stabilize the debt as a share of the economy over the coming decade, an important and realistic near-term deficit-reduction goal.  Of this total, $1.7 trillion in savings represented policy changes — revenue increases or spending cuts — while the rest reflected the interest savings.  With the $563 billion in new revenue in ATRA, the total amount of additional policy-related savings needed to stabilize the debt by 2022 declines to about $1.2 trillion.  (This figure may change at the end of the month when the Congressional Budget Office issues its new budget projections.)

If this additional $1.2 trillion in policy savings comes through spending cuts alone, total spending cuts will equal nearly $2.7 trillion while revenue increases would total just $563 billion — a ratio of 4.8 to 1 for spending cuts relative to revenue increases.  Moreover, it would be extremely hard for policymakers to achieve budget cuts of this magnitude without making cuts that increase poverty and hardship, increase the ranks of the uninsured, jeopardize needed funding in areas that are important to future economic growth (such as education, infrastructure, and basic research), or some combination of the above.

In contrast, if the additional $1.2 trillion in savings is split evenly between spending cuts and revenue increases, the resulting ratio will be 1.8 to 1, with spending cuts of $2.1 trillion and increased revenue of $1.2 trillion.  This cumulative total would still favor spending cuts over revenue increases by a substantial margin.  The original Bowles-Simpson plan, when looked at over the 2013-2022 period, had a spending-to-revenue ratio of close to 1-to-1.

During top-level negotiations in December on a broader deficit reduction framework, Speaker Boehner’s offer showed an even split between spending cuts and revenue increases. Unfortunately, the Republican position on that is now likely to change dramatically.