A truly balanced approach to deficit reduction

With competing budgets on the House and Senate floors this week, it’s easy to get lost in the details. But we should look at the big picture and ask the most important questions: what are we trying to accomplish, and how should we reach that goal?

There’s been a lot of discussion about how much deficit reduction the budget should include. But deficit reduction itself isn’t the goal — it’s one piece of a longer-term strategy to improve the economy and the country, and it must be designed and implemented carefully to avoid endangering the economic recovery or harming our most vulnerable populations. 

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For starters, over the next decade we should stop the debt from growing faster than the economy; failing to do so erodes future living standards and risks an eventual economic crisis. This is the minimum goal we should shoot for over the decade. 

After designing such a plan or a somewhat more ambitious one, policymakers should phase it in over the coming years without seeking further deficit reduction in the next year or two, when the economy will remain too weak to absorb austerity measures without such measures slowing growth and causing the loss of more jobs. 

The Congressional Budget Office (CBO) estimates the economy will grow an anemic 1.4 percent this year, with the unemployment rate remaining close to 8 percent. The sequestration cuts are a key reason for this disappointing forecast: CBO says its growth forecast is 0.6 percentage points lower because of sequestration, and that sequestration will cost 750,000 jobs by the end of the year.

An even better approach would be to couple substantial, permanent deficit-reduction measures with more modest temporary measures to accelerate growth and job creation — as economists such as former Federal Reserve vice chairman Alan Blinder and former Office of Management and Budget and CBO director Peter Orszag recommend. This combination of policies would avoid the problem that CBO has clearly identified: too much deficit reduction too soon would slow economic growth even more over the next few years.

Beyond the amount and speed of deficit reduction, what also matters greatly are the contents of a viable deficit-reduction plan. In designing a plan, the quality of deficit reduction matters, not just the quantity.

Some policymakers want all further deficit reduction to come from spending cuts; others seek a mix of spending cuts and revenue increases.

As Martin Feldstein, a top economic adviser to former President Reagan, suggests, we can satisfy both sides if we understand that spending occurs not only on the outlay side of the budget but also on the tax side, in the form of credits, deductions, exclusions and other preferences known collectively as “tax expenditures.” Policymakers can combine spending reductions that produce outlay savings with reductions in spending that’s delivered through the tax code.

This approach offers a potential for substantial savings. The income tax provides about $1.1 trillion a year in tax expenditures — far more than the cost of Medicare and Medicaid combined, more than the cost of Social Security and bigger than the defense budget. Alan Greenspan once aptly called these measures “tax entitlements” and said they should be considered along with spending entitlements when policymakers draft deficit-reduction measures.

Greenspan was right: We should not put tax code subsidies off-limits for deficit reduction while targeting subsidies from outlay programs just because the former is delivered through the tax code and the latter through a “spending” program.

What’s more, tax expenditures disproportionately benefit the highest-income earners. The top fifth of Americans received 66 percent of all individual tax-expenditure benefits in tax year 2011, the Urban-Brookings Tax Policy Center has estimated, while the bottom fifth received just 2.8 percent.

Which brings me to my final point: Deficit reduction shouldn’t harm our nation’s most vulnerable families and individuals.

The Bowles-Simpson commission adopted a core principle that deficit reduction should not increase poverty or inequality. The co-chairmen have since reiterated this principle, which was also adopted by the Senate’s bipartisan “Gang of Six” in its plan of July 2011.

Various past deficit-reduction efforts have met the tests of both quantity and quality. In fact, the bipartisan packages of 1990 and 1997 and the Democratic package of 1993 — which, combined, helped turn huge deficits into four years of surpluses starting in 1998 — included steps to reduce poverty or increase access to healthcare even as they substantially shrunk deficits.

A balanced approach to deficit reduction that includes both adequate new revenues from curbing tax-code spending and additional spending cuts can further reduce deficits while maintaining the resources to invest in key building blocks of our nation’s future economic prosperity.


Greenstein is president of the Center on Budget and Policy Priorities.