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Setting the Right Budget Goals

March 13, 2015 at 7:54 PM
BY
CBPP

Two likely goals of the budget plans that the House and Senate Budget Committees are due to consider next week — balancing the budget in ten years and doing so with no new revenues — are severely flawed, our new paper explains.  Here’s the opening:

The House and Senate are expected to consider their respective budget resolutions starting next week.  Press reports suggest that the resolutions will likely be shaped in substantial part by two fiscal goals:  balancing the budget over the next ten years, which would likely require roughly $4½ trillion in policy savings, and using no new revenues to help achieve those large savings.  The combination of these two goals has large and serious effects, making it highly likely that the forthcoming Republican budgets will be built around policies that would increase poverty and inequality and adversely affect many low- and middle-income families.

The budgets that then-House Budget Committee Chairman Paul Ryan crafted and the House passed each of the last few years demonstrate this.  In last year’s House budget, more than two-thirds of the cuts would have come from programs focused on low- and moderate-income households, even though such programs account for less than one-quarter of all program costs.  That budget would have made health insurance unaffordable for tens of millions of Americans, increased poverty and serious hardship, and squeezed investments in programs such as education and basic research that can boost opportunity and future productivity growth.

This year’s House and Senate budget resolutions won’t be identical to last year’s House budget.  But they likely won’t vary dramatically from it if congressional GOP leaders continue to adhere to the goals of balancing the budget and placing the entire burden of deficit reduction on programs, with no deficit reduction whatsoever from the more than $1 trillion a year in tax expenditures — tax credits, deductions, and other preferences that are effectively spending through the tax code.  Conservative Harvard economist and former Reagan economic advisor Martin Feldstein has said that reducing tax expenditures is “the best way to reduce government spending.”

Some may defend a no-new-revenue approach to deficit reduction by claiming that the federal government’s size and reach are expanding dramatically.  The data, however, do not support such a claim, as a recent CBPP analysis demonstrates.  Federal program spending (excluding interest costs) outside Social Security and Medicare has now fallen below its 40-year historical average and is projected to decline further under current policies.  Total federal spending, as a share of gross domestic product (GDP), is now lower than it was every year of the Reagan administration.  To be sure, Social Security and Medicare spending is projected to rise over time.  That reflects an aging population and rising health care costs throughout the U.S. health care system, however, rather than expanded coverage, more generous benefits, or some other broad expansion of the federal government.

A budget that adheres to the balanced-budget mantra while ruling out any deficit reduction from the numerous tax expenditures that disproportionately benefit well-to-do Americans will almost certainly place the onus of deficit reduction on programs disproportionately serving Americans with modest incomes.

The major successful deficit-reduction efforts of the past have relied on a balanced mix of both program reductions and revenue increases.  That was true of the bipartisan budget deal of 1990 (under President George H.W. Bush) and the Democratic plan of 1993 (under President Clinton).  Those plans contributed to transforming the huge deficits of the early 1990s into four straight years of budget surpluses starting in 1998.

More recently, the separate bipartisan plans that Alan Simpson and Erskine Bowles (co-chairs of the National Commission on Fiscal Responsibility and Reform) and Alice Rivlin and Pete Domenici (co-chairs of the Bipartisan Policy Center Debt Reduction Task Force) produced in late 2010 underscore these points.  Both plans contained major deficit reduction measures, and both included substantial revenue increases as well as program cuts.  Moreover, neither sought, nor called for, budget balance within ten years.  These plans sought to reverse the upward trend in the debt ratio without chasing the bumper-sticker slogan of a balanced budget.

In addition, both plans adhered to a principle that deficit reduction should not increase poverty.  That core principle is virtually impossible to honor if revenues contribute nothing to deficit reduction.  Ruling out a revenue contribution virtually ensures that a heavy share of the deficit reduction burden will fall on those least able to bear it.

Click here for the full report.