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Bowles-Simpson Budget Plan a Useful Start — But Changes Badly Needed

We issued a major analysis today of the November 10 proposal by the co-chairs of President Obama’s fiscal commission, former Clinton White House Chief of Staff Erskine Bowles and former Republican Senator Alan Simpson.

The plan helps move the budget debate beyond misguided claims that policymakers can tame deficits simply or primarily by eliminating earmarks and “waste, fraud, and abuse.”  It also wisely subjects all parts of the budget to review and outlines an array of hard choices.

Unfortunately, the plan does not represent a truly balanced approach to bringing deficits under control.  Bowles and Simpson describe a real problem of deficits and debt that will grow to unsustainable levels, and they propose a number of policy changes that should be part of any serious debate on the budget.  Yet, as a whole, their package falls far short of an appropriate or equitable plan for the federal budget in the years and decades ahead, as a careful analysis of it shows.

Specifically, the plan starts to take effect in fiscal year 2012, which could threaten the fragile economic recovery; it proposes policy steps that would prove a serious hardship for some of the nation’s most disadvantaged individuals; it relies far too much on spending cuts as opposed to revenue increases (both as a whole and, in particular, in its proposals to strengthen Social Security’s finances); and it calls for adopting policies that will hold annual revenues and spending to 21 percent of Gross Domestic Product (GDP) in future decades, which is both unrealistic and unwise.

Bowles and Simpson presented their plan as a “starting point” for the commission’s deliberations.  Our new analysis focuses on the areas where their plan poses the most serious problems; it identifies the aspects of it that the commission most needs to change if the “starting point” is to become a balanced plan that would help to put the federal budget on a sound course without causing substantial damage in the process.  The chart below lists what we regard as six most important changes needed.

The Six Most Important Improvements Needed in the Plan

In unveiling their plan, Erskine Bowles and Alan Simpson stressed that it was only a starting point. Based on the analysis in this paper, we regard the following as the six most important changes needed in the plan.

  1. Relax the revenue and expenditure targets. The proposal to cap revenues at an arbitrary level of 21 percent of GDP is highly ill-advised in light of the aging of the population, continued increases in health care costs, and the fact that the United States could face major unforeseen challenges in the future — at home or abroad — that require expenditures that cannot be anticipated today. Similarly, limiting expenditures to 21 percent of GDP in future decades will be impossible without draconian and unsound cutbacks in essential areas.
  2. Address the imbalance between budget cuts and revenue increases. The highly problematic features in the plan stem largely from an effort to extract two-thirds of the deficit reduction from budget cuts and only one-third from revenues.
  3. Address the overly deep benefit cuts on Social Security beneficiaries of modest means. Here, too, the problems stem from excessive reliance on benefit cuts and inadequate contributions from revenues. It is not possible to take two-thirds of the Social Security savings from benefit cuts —rising to four-fifths by the 75th year — without doing serious damage to people who can’t afford to absorb those cuts.
  4. Scale back excessive health care cuts, especially those that could harm vulnerable people or endanger health reform. Policymakers should also ensure that any health care expenditure target for future decades is set on a per-beneficiary basis, with adjustment for demographic changes in the mix of beneficiaries.
  5. Moderate the depth of the domestic discretionary cuts, particularly with an eye to ensuring that the federal government can function effectively. Cuts that would impair federal agencies’ ability to perform their assigned tasks should be avoided.
  6. Avoid instituting cuts 10½ months from now (i.e., in fiscal year 2012) in order to avoid impeding the fragile economic recovery. The cuts should not begin before fiscal year 2013 to give the economy more time to get a point where it can safely absorb them.