Editor's Note: Edward Alden is a senior fellow at the Council on Foreign Relations, where he writes the blog Renewing America. The following is reprinted with the permission of CFR.org. The views expressed in this article are solely those of Edward Alden.
By Edward Alden, CFR.org
What should Congress and the Obama administration do to bring the federal deficit under control? Well, according to the Congressional Budget Office’s annual Budget and Economic Outlook, the answer is quite simple: absolutely nothing at all.
For all the campaign talk of the United States facing a spiraling federal budget deficit leading to a crippling debt burden for future generations, the laws already passed by Congress and signed by the President are set to bring the budget under control surprisingly quickly. Under the so-called “baseline” assumptions, even with modest economic growth projections, the federal deficit is currently set to shrink from $1.3 trillion in 2011, or 8.7 percent of GDP, to just $196 billion, or 0.9 percent of GDP, by 2018. While the numbers will start creeping up slightly after that, and debt service costs will nearly double, the budget situation will remain entirely manageable and, barring an unexpected spike in interest rates, produce nothing close to a fiscal crisis. The debt-to-GDP ratio would fall from 75 percent to 62 percent by 2022.
Chart source: Congressional Budget Office
So why will no one pay attention to this, and instead read the CBO numbers, which are somewhat more pessimistic than the last forecast in August, 2011, as proof of a dire and worsening fiscal situation? Because neither Democrats nor Republicans are prepared to live with the consequences of the choices they have already made.
On the tax side, doing nothing means allowing the Bush tax cuts to expire in their entirety, allowing the payroll tax to rise back to its previous level, and forcing more taxpayers to pay the Alternative Minimum Tax (AMT). On the spending side, it would mean cutting reimbursements to doctors under Medicare, and implementing $1.2 trillion in cuts to defense and discretionary spending as agreed in last year’s budget deal.
Under this scenario - which, to repeat, requires absolutely no action by Congress - federal revenues would rise from 16.3 percent of GDP this year to 21 percent in 2022, significantly higher than the 18 percent average of the past 40 years. Mandatory spending (Social Security, Medicare, and Medicaid) would continue to rise in real terms, while discretionary spending would fall from 7.7 percent of GDP to just 5.7 percent, the smallest share in more than four decades. As the CBO notes, “the operations of the federal government would differ significantly from what they are today.”
None of this is good policy. A steep tax increase, especially over the next two years when the economy is still projected to be weak, would be poor timing that could further depress growth. The CBO projects significantly higher unemployment, more than 9 percent next year, if both the tax increases and spending cuts take place. And it makes far more long-term sense to restrain mandatory spending - which mostly goes to retirees - than cutting discretionary programs in education, infrastructure, research & development and other programs that benefit the current and future workforce.
But in the elusive search for a more sensible budget deal, why not start with a political agreement that accepts the baseline as an immovable target? In other words, Congress would be free to alter the mix and timing of tax increases and spending cuts, but the resulting budget deficit could be no larger than under the current baseline assumption. Simple? Of course not. But then there’s always the option of doing nothing.
The views expressed in this article are solely those of Edward Alden.
© 2012 Cable News Network. Turner Broadcasting System, Inc. All Rights Reserved.
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Fareed, Did you see the movie trailer for "The Dictator"? I fell out of my chair!
I have a better idea. Cut the military budget, stop all these stupid wars that we're in and make the rich pay theit fair share of the taxes. What's wrong with that???
This article totally ignores the larger issue – what should the size of our government be? It should not be 25% of our GDP which is its size now. Very misleading article. The government is out of control on its spending but of course CNN would never ever publish that. Quote from the report by the Naional Commission on Fiscal Responsibility: "Our nation is on an unsustainable fiscal path..."
Fareed – really, when are you going to wake up?
As the article said, the spending will defacto decrease if nothing is changed.
To answer your question, I think spending should be somewhere in the range of 17-19 percent of GDP.
Somethimes to do nothing is wiser to do something unwise. Let the mechansism take its course.
please read: wiser THAN to do.......
Perhaps, but I think we would be even better off if the Bush era tax code was used as leverage to get tax reform to a more efficient system. Fareed has talked a lot about cleaning up the tax code like we did in the 1990's. If the tax code is changed enough, Republicans can pretend that net taxes did not go up. The other spending cuts can be used as leverage to spread spending cuts out across more programs using a Simpson-Bowles type approach. I agree with the author that the current cuts should be used as a baseline.
Wouldn't that decrease just come in the form of the proposed increase? Do nothing? our debt is 100% of GDP and I don't hear serious talks to "do nothing" just serious talks to "do more" for people, cut the government down to size, stop propping up peoples stupid decisions with other peoples money and we'll be okay
The GOP solution: Start a war with Iran (totally unfunded of course). Then we can have the poor people fight/die in the war while giving the rich people "no bid contracts" (killing two birds with one stone). We can use Iran's oil to pay for the war. And when the war is over, Iran will sell us cheap oil!!!! Just like in Iraq!!!!! Oh wait............never mind.
If you look at the traditional size of our government spending in % of GDP every year, what were we at in the years immediately prior to world war 2? Should not that be close to our targeted government size for the future? Granted some increases for programs based on technologies that weren't around then should be allowed for such as space and medical, but for the most part I think that Dr. Ron Paul says it best about this in his books.
The size of our government is too large to not be considered as one of your factors. Please include your opinion about this in your story. I would love to read it.
How about just not spending more? Let the people keep their money and then there wouldn't be so much perceived need for gov't.
Sell Alaska to Canada