Economy & Budget

Can Washington handle these 6 fiscal truths?

Greg Nash

Tuesday’s update of the Congressional Budget Office’s (CBO) budget and economic outlook will only intensify the debate in the nation’s capital over the course of U.S. fiscal policy. With federal taxes, spending and deficits all poised to grow as a share of gross domestic product (GDP) over the coming decade, President Obama’s successor is inheriting a fiscal mess.

{mosads}As one of us wrote five years ago, Secretary of State Dean Acheson once admitted he was willing to “scare hell out of the American people” with arguments that were “clearer than the truth” to sway public opinion behind President Truman’s policy of Soviet containment.

But sometimes the truth alone is scary enough, particularly when you’re talking about today’s red menace: the federal budget deficit.

What are these truths?

Truth No. 1: The CBO reported on Tuesday that the budget deficit is, under current law, expected to total $590 billion this year and $8.571 trillion over the coming decade. At $590 billion, this year’s deficit is larger than Argentina’s entire economy.

Truth No. 2: Because of these deficits, the publicly held federal debt is poised to grow 64 percent within 10 years, nearly tripling annual net interest costs to $712 billion in the process.

And that’s using the CBO’s assumption that interest rates will rise only “gradually over the next few years.” While that’s not unrealistic, if the CBO’s interest rate assumptions prove to be overly optimistic, the repercussions could be devastating. As the CBO reported in January, “if interest rates were 1 percentage point higher than projected in CBO’s baseline … the cumulative deficit would be $1.6 trillion higher over the 2017–2026 period.”

Truth No. 3: The source of our long-term fiscal predicament is not a lack of revenue, but an overabundance of spending. As reported by the CBO, over the past 50 years, federal revenue averaged 17.4 percent of GDP while outlays averaged 20.2 percent. Revenue and outlays exceed those levels today and, according to a report released by the CBO last month, both are projected to rise even further, with annual revenue exceeding 19 percent of GDP and outlays exceeding 27 percent of GDP (!) within 30 years.

Truth No. 4: In both the short- and long-term, most of the increase in federal spending is driven by so-called mandatory programs. Over the next 10 years, the CBO projects mandatory spending will account for 70 percent of the increase in federal outlays. Increased net interest costs account for another 20 percent, while discretionary spending accounts for the remaining 10 percent.

The bottom line? Any serious effort to put federal finances on a sustainable path will require bipartisan cooperation to moderate mandatory spending growth.

Truth No. 5: Although undoubtedly a heavy political lift, placing U.S. fiscal policy on a sustainable course is surprisingly straightforward. As Dan Mitchell, a senior fellow at the Cato Institute, wrote in his analysis of Tuesday’s report from the CBO: “So here’s the choice in front of the American people. Either allow spending to grow on autopilot, which would mean a return to trillion dollar-plus deficits within eight years. Or limit spending so it grows at the rate of inflation, which would balance the budget in eight years.”

Federal spending continues to grow, only more slowly. The budget eases into balance. No tax increase required.

Truth No. 6: While tax increases are not necessary to solve our fiscal predicament, pro-growth tax reform can and should contribute to the eventual solution. The current lack of economic growth is, after all, a contributing factor to the problem we face.

The CBO’s new outlook assumes an average real GDP growth rate of 2 percent between now and 2026. Setting aside the fact that the CBO fails to factor in the very real possibility of another recession, this is virtually identical to the average growth rate in the U.S. since the end of the last recession. But as Martin Regalia, the U.S. Chamber of Commerce’s chief economist, pointed out earlier this year, this has been “the weakest expansion in the modern era.”

Growing the economy and relieving the pressure on the federal budget, if only marginally, with a comprehensive package of pro-growth tax reforms is far superior to trying to squeeze more revenue out of the hopelessly complex and cumbersome federal tax code as it exists today.

Raising the average annual GDP growth rate by half a percentage point would, without a tax increase, boost private-sector economic output by trillions of dollars and generate more than $1 trillion in additional federal revenue over 10 years. Then, not to be overlooked, there’s the budgetary savings faster economic growth would inevitably produce from lower spending on the federal “safety net” and certain other programs.

Dean Acheson may have thought it necessary to scare the American people into supporting containment, but the national security threat facing the U.S. today — the federal budget deficit — cannot be contained and left to wither on its own. The best way to clean up our fiscal mess is through a combination of spending restraint and pro-growth tax reform. Now let’s get to work.

Carter served as deputy assistant secretary of the Treasury under President George W. Bush and later served on the staff of the U.S. Senate Budget Committee. Sepp is president of the National Taxpayers Union.

The views expressed by contributors are their own and not the views of The Hill.


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