Unbalanced Approach to Deficit Reduction

By Jason Furman

Democrats and Republicans agree that getting our fiscal house in order is one of the critical challenges facing America. To address it we are going to have to make tough choices, bringing to the table a commitment to examine every area of the budget and every loophole in the tax code without presumptively taking any of the options off the table. But it is critical that we not bring down our deficits and debt at the expense of economic growth, innovation and job creation, or place the greatest burden on older Americans and the most vulnerable. That is precisely what the House’s Cut, Cap and Balance plan would do – a proposal that White House Press Secretary Jay Carney described as “duck, dodge and dismantle.”

The House plan fails to achieve a balanced plan to reduce the deficit, which is precisely the approach that has worked successfully in America in the past and has recently been recommended by a number of different fiscal commissions.

Let’s start with the “cut” and “cap” portions of the bill.  These sections require spending cuts in 2012 and caps over the next decade identical to those in the House Budget Committee Chairman Paul Ryan’s plan., By House Republicans’ own design, achieving those spending levels would require cuts that would be harmful to the economic recovery in the short-term while also damaging our long-term competitiveness and placing a higher burden on seniors and the most vulnerable. To give a few examples:

•The bill would abruptly cut more than $100 billion in spending in the first year alone, a step that Congressional Budget Office Director Doug Elmendorf stated would “affect our projections for GDP growth over the next two years.”

•The House Budget Resolution plan would cut clean energy investments by 70 percent, infrastructure investments by a third, and education and training by 25 percent – cutting 320,000 children from Head Start and reducing aid for families trying to put their kids through college by hundreds, or even thousands of dollars.

•It would cut Medicaid by one-third over the decade, and by nearly 50% by 2030. This could, according to the Kaiser Family Foundation, result in 36 million people losing Medicaid coverage, including people with disabilities and seniors in nursing homes.  And that comes on top of the 17 million who would lose coverage due to repealing subsidies in the Affordable Care Act.

•And it would cut programs for the most vulnerable – for example, by food stamp benefits for a family of four by $1,760 per year or cut 8 million households from the program.

•Finally, the House Budget Resolution proposed to convert Medicare to a voucher program, increasing costs for Medicare beneficiaries by $6,400 a year beginning in 2021 – with those higher costs increasing over time.

But “Cut, Cap and Balance” doesn’t stop there. It also includes a requirement that to secure an increase in the debt limit necessary to avoid default – and a devastating impact on families and businesses – Congress must pass a constitutional amendment requiring a balanced budget. Moreover, it is an extreme version of a constitutional amendment that would cap government spending and require a two-thirds supermajority to cut tax loopholes or take other steps on revenue. The President has frequently made clear why he thinks a Balanced Budget Amendment is a misguided effort to absolve leaders in Washington of their responsibility for making tough choices. But it is important to understand what this requirement means when added on top of the cuts in the House Budget Resolution.

To start with, consider that at the end of the next decade, the House plan would still be $400 billion a year short of achieving a balanced budget. Unless Republicans are willing to entertain $3 to $4 trillion in additional revenues over the next decade, that means $400 billion a year would need to be cut beyond the House Budget Resolution.

And when you’ve already made such deep cuts to discretionary spending, Medicaid and other programs, it becomes difficult to imagine any credible ways to achieve those spending levels without including Social Security in the reductions and making substantially deeper reductions in Medicare.

So if the required spending cut were across the board, it would mean all programs, including Social Security and Medicare, would be cut by 10 percent by the end of the decade on top of the House Budget Resolution. If defense spending alone were exempted, it would mean that all other programs (again including Social Security and Medicare) would be cut by about 12 percent by the end of the decade on top of the House Budget Resolution. It would be possible to avoid cuts of this magnitude, but that would require dramatically deeper reductions than the one-third cut in Medicaid and infrastructure currently proposed in the House Budget Resolution.

We obviously don’t agree with this approach.  The President has proposed a comprehensive approach that ensures we live within our means and reduces the deficit by $4 trillion, while supporting economic growth and long-term job creation, protecting critical investments, and meeting the commitments made to provide economic security to Americans no matter their circumstances. We want to make significant cuts to government spending, including additional savings that come from further strengthening critical programs like Medicare, while protecting the recovery, strengthening the middle class and making the investments that will promote economic growth so folks feel confident in their futures and their children’s futures.

Representatives from both parties will continue to talk about reaching the largest deal possible.  The President is pushing everyone to come to the table, put politics aside, work through our differences and prove to the American people that we can still do big and difficult, but necessary things.

Jason Furman is the Principal Deputy Director of the National Economic Council.