Deficit Reduction Should Be a High Priority

Lenny Grover
Aug 27, 2017 · 3 min read
Historical national debt as a percentage of GDP, and the Congressional Budget Office’s long-term debt forecast (Source)

With the Great Recession firmly in the past, the unemployment rate at 4.3%, and real GDP growing between 1% and 3% a year, the need for fiscal stimulus is behind us. Nevertheless, the Congressional Budget Office expects the deficit for the fiscal year ending September 30 to be $693 billion. In the absence of a change in policy, the CBO projects that the US will ultimately accumulate more debt, as a percentage of GDP, than ever before — even higher levels than were required to pay for the second world war. If the US acts quickly to reduce the deficit, it can eliminate the need for more painful cuts and tax increases in the future.

To understand how the US budget got so out of balance since the Clinton-era surpluses, it is instructive to look at three key policy changes during the Bush administration that have persisted into the present: tax cuts, a dramatic ramp in military spending, and Medicare Part D. These three factors, alone, are estimated to be responsible for more than the current deficit.

When the Obama administration made the Bush tax cuts permanent for most taxpayers, rather than letting them expire, the CBO estimated that it would result in $336B less federal revenue in FY2017. Between FY2001 and FY2008, the defense budget rose from $316B to $666B, an increase of $350B. While the wind down of the wars in Iraq and Afghanistan resulted in reduced military expenditures, the estimated FY2017 budget of $582.7B is still $266B higher than pre-9/11 levels. Finally, Bush’s prescription drug entitlement for seniors is responsible for $109.7B in gross spending in 2017 — a cost that is inflated by an estimated $15.2B to $16B since the law prevented the government from negotiating drug prices with pharmaceutical companies.

To address Bush’s busted budgets, President Obama created the National Commission on Fiscal Responsibility and Reform in 2010. However, as the country was still emerging from the Great Recession, deficit reduction was opposed by both liberals (who favored fiscal stimulus) and conservatives (who opposed tax increases). With the recession now a distant memory, it is imperative that deficit reduction become a priority for the current administration. Repealing the Bush tax cuts, cutting the military budget, and reforming the Medicare Part D program would go a long way to bringing us back into fiscal balance. However, there are other avenues that could also be explored, including a carbon tax and entitlement reform. Reconstituting a bipartisan commission would allow for a thorough analysis of the available options, while helping to build support for a deficit reduction plan among both Democrats and Republicans.

Unfortunately, both congressional Republicans and the Trump administration have indicated that they would rather focus on revenue-neutral or revenue-negative tax reform that will do nothing to address the nation’s fiscal imbalance. While kicking the can down the road may be the easiest approach, politically, it will make the spending cuts and tax increases in the future even more painful. After the second world war, the debt was reduced thanks to extremely high tax rates; marginal tax rates were as high as 91% for those in the top bracket — and that was without the high cost of Medicare (which did not yet exist).

The time to act is now! Annual entitlement outlays are expected to increase in the coming years as the share of population that is at retirement age rises. Even though low interest rates have kept borrowing costs low, there is no guarantee that interest rates will remain low indefinitely. Every year that the debt is allowed to grow will make the policy changes required to avert a fiscal crisis even more severe. Though party orthodoxy on both sides of the aisle (Democrats opposing entitlement or other spending cuts and Republicans opposing tax increases) may make a compromise politically difficult, the threat of a severe future fiscal crisis should bring responsible politicians together to develop a bipartisan solution. By reconstituting a bipartisan deficit reduction commission, the President can show the necessary leadership to help the nation confront this shared challenge.

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Entrepreneur turned junior VC investment professional turned Entrepreneur

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