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February 01, 2010

"Choosing the Nation’s Fiscal Future," A New Report on the U.S. Long-Term Fiscal Policy

Posted by Steve Redburn, elected National Academy of Public Administration (NAPA) fellow 

A new report suggests that if the federal budget were a big ship it would be headed for the rocks. That is its bad news. Its good news is that there is ample time for the ship to turn away, and there are many routes out of danger. That judgment was reached by a joint committee of 21 budget and policy experts assembled by the National Research Council and the National Academy of Public Administration. The Committee was co-chaired by John Palmer, university professor and dean emeritus of the Maxwell School of Citizenship and Public Affairs, Syracuse University, and Rudolph Penner, fellow at the Urban Institute and former director of the U.S. Congressional Budget Office.

The resulting report, funded by the John D. and Catherine T. MacArthur Foundation, was released January 13, 2010.  It is titled Choosing the Nation's Fiscal Future, and available from the National Academies Press or online at www.ourfiscalfuture.org . The report urges that future budgets include proposals to limit spending growth and/or raise additional revenues starting in 2012. The committee’s judgment is that these policy changes should be large enough to stabilize the debt at no more than 60 percent of GDP within a decade.

The committee recognized that this will not be easy politically, but its report is intended to show that it is feasible, by laying out a set of options that span the ideological spectrum.  It examines options for limiting federal spending on Medicare and Medicaid, Social Security, defense and other spending and options for raising revenues that show how reforms to the income tax and the addition of new revenue sources could make the tax system more efficient.

The report illustrates the many routes away from danger with four possible combinations of options that would lead to fiscal stability.  At one end of the range, one route combines options that would keep tax burdens close to the levels of the past few decades. This would require a dose of strong medicine to dramatically slow the growth of Medicare and Medicaid, lowering the growth of Social Security benefits, and many other program cuts.  Another route would raise federal revenues to levels far beyond recent U.S. experience but not that of some European countries. Even then, fiscal stability would require a significant slowdown in future growth of the big federal health programs. The committee’s report describes courses intermediate between these two that represent different tradeoffs between keeping commitments to an aging population and making needed public investments.

The committee’s report also presents proposals to make the budget process more far-sighted and hold leaders accountable for properly reforming fiscal policies while there is time to do so safely.  These include making better use of information about the long-run budget outlook in the annual budget process and setting goals – such as a target for stabilizing the debt as a percent of GDP – against which to measure progress.

No one can say exactly what will happen if we do not change fiscal policies, but the consequences are bound to be highly undesirable. One possibility suggested is that the heavy load of debt and commitments for health, pensions, and other responsibilities causes the fiscal ship to slowly run aground, draining the nation's economic vitality. Another danger is getting caught in an accelerating whirlpool of higher debt, higher interest payments to holders of the debt (nearly half going to investors abroad), more borrowing to pay interest, growing doubts about whether the U.S. can sustain its commitments and meet its debt obligations, causing investors to demand still higher interest rates -- a potential fiscal Charybdis that ends in a financial crisis.  The committee argues, however, that neither outcome is necessary if leaders propose and gain support for a budget that will, by 2012, begin turning the big ship toward safer waters.  If they delay, the necessary adjustments become ever more painful.

The study committee has built a GPS for policy makers to use as they seek safer waters.  To get there, leaders and voters will need to agree on what new course to take.  The report recognizes that it will be hard political work to turn such a big ship, but argues that this will be easier for all than ending up on the rocks.

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