The Composition of Past Deficit-Reduction Packages – And Lessons for the Next One

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.

Technical Note

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.^[1]