Four Tests of Budget and Debt-Limit Deals

Congress returns to work this week with the House and Senate far apart on setting funding levels for fiscal year 2014 and on raising the debt ceiling to pay for spending that Congress has already approved.  In all likelihood, policymakers will avoid a government shutdown and a default on the nation’s financial obligations, our new report explains, but averting these crises isn’t enough; the compromises reached must also represent sound policy.  Our report lays out four tests to evaluate proposals to resolve the pending issues:

1. Do they strengthen the economic recovery?
2. Do they protect low-income Americans and avoid increasing poverty and hardship?
3. Do they permit adequate investment in core public services?
4. Do they reflect a balanced approach, both between budget cuts and revenue increases and between defense and non-defense funding?

What package would meet these criteria?  The best approach would be to raise the debt ceiling and to replace the scheduled budget cuts known as sequestration with a package that includes:  (a) sizeable alternative deficit-reduction measures that take effect gradually as the economy and the labor market strengthen and (b) temporary upfront measures to boost job creation now. Such a package would shrink deficits by less than sequestration in the next few years but by more than sequestration in the latter years of the decade — and in future decades. This approach would avoid significantly underfunding key public services and eschew budget cuts that would worsen poverty or leave more low-income Americans without access to health care. It’s also consistent with the view of the International Monetary Fund, which recently advised that policymakers should “[repeal] the sequester and [adopt] a more balanced and gradual pace of fiscal consolidation in the short term; expeditiously [raise] the debt ceiling to avoid a severe shock to the U.S. and the global economy; and [implement] a comprehensive and back-loaded set of measures to restore long-run fiscal sustainability.”