The Composition of Past Deficit-Reduction Packages – And Lessons for the Next One
November 15, 2011
Revenue increases were a part of every major deficit-reduction package in the 1980s and 1990s until the Balanced Budget Act of 1997. In several cases -- notably in 1982 and 1984 (where they offset a portion of President Reagan's large tax cuts of 1981) -- they dominated the package. In several other cases -- 1987, 1990, and 1993 -- they contributed one-third to more than one-half of the total savings (including the debt-service savings), and a larger share of the policy savings (i.e., if the debt service savings are set to the side rather than counted as a spending cut).
Both the 1990 and 1993 deficit-reduction packages included significant savings in discretionary spending, made possible in part by the "peace dividend" at the end of the Cold War. The 1997 package also assumed significant discretionary savings, but those proved to be unrealistic as a streak of surpluses in 1998-2001 weakened policymakers' resolve to stay within the caps that package established. The Budget Control Act of 2011 consisted overwhelmingly of cuts to future discretionary spending, which -- if fully implemented -- will drive such spending to its lowest level in over six decades as a percent of gross domestic product (GDP).
A key aim of fiscal sustainability is a stable or declining ratio of debt to GDP. To stabilize that ratio, we need to get deficits in the medium term down to about 3 percent of GDP. But under current policies, the deficit will be about 4 percent to 5 percent of GDP for the next decade even after the economy recovers and after we have phased down operations in Iraq and Afghanistan. So we need to cut the deficit by 1 percent to 2 percent of GDP in the coming decade -- an amount that rivals the biggest deficit-reduction efforts of the past. Meanwhile, the nation faces a graying population and continued demands on government in the areas of defense, homeland security, veterans' care, infrastructure, and other needs; the amount of deficit reduction for future decades will need to be larger.
Given the size of that challenge, and the need to phase in any entitlement changes gradually, the next round of deficit reduction must include substantial revenue increases. In fact, simply letting the Bush tax cuts expire at the end of 2012 -- or paying for those provisions that we choose to extend -- would essentially stabilize the deficit for the next decade, buying us time to adopt gradual changes in entitlement programs and figure out the best ways to control health-care costs without jeopardizing coverage.
Data come from the Congressional Budget Office (CBO) and the U.S. Department of Treasury. Particularly for the older packages, it is impossible to find complete data, hence the large number of entries labeled "not available" (n.a.). Specific sources are noted. The tabulations cover omnibus deficit-reduction deals only; therefore, they omit a number of deficit-increasing packages, such as the 1981 Reagan tax cuts, the 2001 and 2003 Bush tax cuts, and the 2003 Medicare drug law. The tabulations also omit some major deficit-reducing laws, such as the 1983 Social Security Amendments and the 1996 welfare reform law, which essentially represented efforts to redesign specific programs rather than parts of a more comprehensive budget deal.
Because these estimates span nearly two decades, it is more meaningful to compare the packages' effects as a proportion of the economy rather than in dollar terms. And because it takes time for many provisions to be fully phased in -- especially because many take effect at the start of a calendar year, three months after the beginning of the fiscal year in question -- it is generally more useful to look at their impacts as a percentage of GDP in the fifth year, rather than over the five-year period.
| Table 1:
Summary of Major Deficit-Reduction Packages Enacted Since 1982
|Period||Change in component, as a percent of GDP||Overall composition||Remarks|
|Over 5 years||In 5th year|
|Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA)||1983-1987||Revenues||1.0%||1.2%||n.a.||Estimates depict revenue effects only, which were the main focus of TEFRA. Although year-by-year numbers are unavailable, CBO's September 1982 report suggests that non-interest outlay savings in two measures (TEFRA and a separate reconciliation bill) were about one-third as big as TEFRA's revenue increases.|
|Deficit Reduction Act of 1984||1985-1989||Revenues||0.4%||0.5%||82%||Estimates depict direct effects of DRA only (revenues and mandatory spending) and omit debt-service savings. Also omit effects of separate, smaller reconciliation and farm bills.|
|1987 budget summit||1988-1992||Revenues||0.3%||0.2%||39%||Estimates include revenues, mandatory spending, discretionary spending, and debt service.|
|Omnibus Budget Reconciliation Act (OBRA) of 1990/budget summit||1991-1995||Revenues||0.5%||0.5%||33%||Estimates include revenues, mandatory spending, discretionary spending, and debt service.|
|OBRA 1993||1994-1998||Revenues||0.7%||0.7%||56%||Estimates include revenues, mandatory spending, discretionary spending, and debt service.|
|Balanced Budget Act of 1997 and Taxpayer Relief Act of 1997||1998-2002||Revenues||-0.2%||-0.2%||-68%||Estimates include revenues, mandatory spending, discretionary spending, and debt service.|
|Budget Control Act of 2011||2012-2016||Revenues||0.0%||0.0%||0%||Estimates include discretionary spending caps, program-integrity provisions, some mandatory provisions, and debt service. Act contained no revenue provisions.|
|Source: Center on Budget and Policy Priorities based on data from Congressional Budget Office and U.S. Department of Treasury. Changes in revenues, outlays, and deficits are expressed as a percent of GDP to enable better comparability across time. Those changes indicate the size of the package; the "composition" indicates its mix. Several major packages are omitted because of a lack of data ; see notes to Table 2.|
| Table 2:
Major Deficit-Reduction Packages Enacted Since 1982 :
Changes in Revenues, Outlays, and Deficit, in Billions of Dollars and as a Percent of GNP or GDP
|Years after enactment||Composition|
|Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) a||1983-1987|
|Deficit Reduction Act of 1984 b||1985-1989|
|Outlays, $billions (mandatory)||-4||-4||-5||-4||-5||-22||18%||n.a.|
|1987 budget summit c||1988-1992|
|Outlays, $billions -- see below *||-23||-20||-22||-25||-29||-119||n.a.||61%|
|OBRA 1990/budget summit d||1991-1995|
|Outlays, $billions -- see below *||-15||-36||-57||-94||-121||-323||62%||67%|
|OBRA 1993 e||1994-1998|
|Outlays, $billions -- see below *||-7||-12||-31||-57||-84||-192||38%||44%|
|Balanced Budget Act of 1997 and Taxpayer Relief Act of 1997 f||1998-2002|
|Outlays, $billions -- see below *||12||-10||-43||-48||-109||-198||171%||169%|
|Budget Control Act of 2011 g||2012-2016|
|Outlays, $billions -- see below *||-21||-42||-59||-75||-87||-284||100%||100%|
|Most estimates were available only in billions of dollars (with no extra digits), and therefore sums may contain minor rounding errors. Effects as a percentage of GNP or GDP are shown based on the economic forecast used by CBO at the time Although the 5-year average is shown for percentages of GDP, it is most appropriate to look at that figure for the final year of the package. Policy savings represent the direct changes to revenues and non-interest spending; total savings include the indirect debt-service savings.
Sources: Congressional Budget Office (CBO), various reports; Jerry Tempalski, "Revenue Effects of Major Tax Bills," U.S. Department of Treasury, Office of Tax Analysis (OTA), Working Paper 81 (September 2006, revised June 2011); Robert Keith, "Deficit Impact of Reconciliation Legislation Enacted in 1990, 1993, and 1997," Congressional Research Service (updated August 30, 2005); Thomas E. Mann, Norman J. Ornstein, Molly Reynolds, "Truth and Reconciliation: Sidestepping the Filibuster," April 20, 2009, http://www.brookings.edu/articles/2009/0420_budget_mann.aspx.
 Until 1992, CBO and most other government agencies emphasized gross national product (GNP) rather than GDP. The two series generally move closely together, and the switch doesn't materially affect historical budget comparisons. See Box 1-2, "The Switch from GNP to GDP," in CBO, The Economic and Budget Outlook: Fiscal Years 1993-1997, January 1992.