The 1 Percent Solution

The 1 Percent Solution

Jason J. Fichtner | Feb 25, 2011

I. INTRODUCTION

The United States has a spending problem. For fiscal year 2010, the federal government spent approximately $3.5 trillion, or almost 24 percent of GDP, while collecting $2.2 trillion in revenue. The result was a $1.37 trillion deficit. For fiscal year 2011, the Congressional Budget Office (CBO) estimates the deficit will increase to over $1.5 trillion,1 and the Office of Management and Budget (OMB) estimates that the deficit will be $1.6 trillion.2 While debt held by the public was approximately $9 trillion in fiscal year 2010, or 62 percent of GDP, the national gross debt, which includes bonds such as those held in the Social Security trust fund, now stands at over $14 trillion and is estimated to climb to over $15 trillion in fiscal year 2011, which would amount to almost 100 percent of GDP.3

While some are calling for tax increases to generate new revenue, the CBO estimates that all taxpayers’ rates would need to more than double in order to fund projected spending increases.4 Rate increases of this magnitude would solve the deficit problem only to create a significant economic problem. With such large deficits and a national debt that is already above $14 trillion, the International Monetary Fund recently issued a warning to the United States that it must control its deficits or the result will be slower economic growth and even more difficult financial and political choices in the future.5

This working paper lays out a general framework for how the nation can address its long-term fiscal challenges, without tax increases, to avert the coming fiscal crisis and balance the budget within the next decade. This paper does not provide a master plan identifying specific programmatic spending reductions in discretionary spending, such as defense and agriculture, nor in entitlement programs, such as Social Security, Medicare, and Medicaid. Entitlement spending on Medicare and Medicaid alone is estimated to continually increase as a share of the economy.6 Controlling the increase in the runaway growth of health-care expenditures will require tough choices that many politicians seem unable to make, and that the public may or may not support. However, what is clear is that spending needs to be controlled. Delaying the tough choices necessary will only require even tougher and harder choices down the road.

This paper provides a framework to compare and evaluate other reform plans and, just as importantly, to stimulate discussion on how to control and reduce government spending. There are many ways to design a plan to reduce the debt and put the nation’s fiscal house in order, and various fiscal commissions, task forces, and think tanks have issued reports and provided detailed reform options to reduce the debt.7 These plans span the spectrum from relying primarily on tax increases or spending reductions to proposing a mix of both.

Instead, this paper provides a framework for evaluating all reform plans at the aggregate level by demonstrating that the focus needs to be on reducing spending, not increasing taxes. In recent testimony before the Senate Finance Committee, former CBO Director Doug Holtz-Eakin stated, “The dire long-term budget outlook is not the result of a shortfall of revenues . . . Instead, the problem is spending. Federal outlays in 2020 are expected to be 25.2 percent of GDP—about $1.2 trillion higher than the 20 percent that has been business as usual in the postwar era.”

ENDNOTES

1.Congressional Budget Office (CBO), The Budget and Economic Outlook: Fiscal Years 2011 to 2021, January 2011, http://www.cbo.gov/ftpdocs/120xx/doc12039/01-26_FY2011Outlook.pdf.

2.Office of Management and Budget (OMB), Budget of the United States Government, Fiscal Year 2011, and OMB, Budget of the United States Government, Fiscal Year 2012.

3.CBO, Budget and Economic Outlook: FY 2011–2021.

4.CBO, The Long-Term Economic Effects of Some Alternative Budget Policies, May 19, 2008, http://www.cbo.gov/ftpdocs/92xx/doc9216/Letter-to-Ryan.1.1.shtml.

5.“U.S. Must Reduce Deficit, IMF Warns,” Washington Post, January 28, 2010.

6.CBO, Budget and Economic Outlook: FY 2011–2021, January 2011.

7.The Center for a Responsible Federal Budget prepared a side-by-side comparison of 12 plans that can be accessed at http://crfb.org/sites/default/files/CRFB_Summary_Table_of_Fiscal_Plans.pdf.

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