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How Much More Deficit Reduction Do We Need?

November 1, 2012 at 9:03 PM

Our new analysis explains that policymakers could stabilize the public debt as a share of the economy over the coming decade by enacting $2 trillion more in deficit reduction.  Here’s the opening:

Some budget watchers are urging the President and Congress to enact $4 trillion in savings over the next ten years in order to address the deficit problem.  The $4 trillion figure has assumed something of a life of its own.  In fact, there is no single magic number.  For example, policymakers could achieve the most essential goal — stabilizing the public debt over the coming decade (that is, ensuring that the debt doesn’t rise faster than the economy and, thus, risk eventual economic problems) — by enacting $2 trillion in savings.


The fact that $2 trillion in additional deficit reduction is sufficient to stabilize the debt, rather than a larger amount, is due both to policies that the President and Congress have enacted over the last two years that have reduced deficits and to new Congressional Budget Office (CBO) economic and budget projections for the coming decade, which are more sanguine than earlier projections. . . .

To be sure, achieving bipartisan agreement on $2 trillion in additional budget savings, which would stabilize the debt at about 73 percent of Gross Domestic Product (GDP) over the latter part of the decade (see graph), will present a serious challenge for policymakers.  This would produce a total of $3.7 trillion in deficit reduction, including the $1.7 trillion enacted last year, and entail revenue increases and program cuts reaching 1.8 percent of GDP by 2018.  That would make the overall package as large as the 1990 deficit-reduction agreement and larger than that of 1993 — the two big budget deals that played an important role in converting the large deficits of the early 1990s to four years of budget surpluses that began in 1998.

Click here for the full analysis.