Spending Cuts and Tax Increases Needed to Balance Budget

November 15, 2010

Alice Rivlin sits on both President Obama’s commission on deficit reduction and is the co-chairman of Bipartisan Policy Center’s debt reduction task force, also known as the Domenici-Rivlin panel. The president’s commission recently released a chairman’s “mark” or outline from the two co-chairmen that received strong reactions on both sides of the political aisle. Rivlin says both parties need to learn to swallow unpleasant medicine.

Reactions to Simpson-Bowles Strong from All Sides

“The President’s Commission on Fiscal Responsibility came back together for the first time since the election and was presented with a tentative plan – a starting point/something to discuss – that was drafted by the two co-chairs, Alan Simpson and Erskine Bowles. It is not a position of the commission, it was just a starting point. It was attacked roundly, which gives you an idea of what is going to happen. Conservatives lashed out that it had tax increases in it, and liberals said it was terrible because it had spending cuts particularly in future reductions in entitlement spending. But that is the way it is going to be. Any balanced plan is going to have to include some revenue increases and some spending cuts. Nobody is going to love it.

This is just the opening round. The commission will meet again this coming week and start deliberating and debating this proposal, and offering alternatives, and things like that. What will eventually happen, I do not know. The important thing is that Republicans and Democrats come together around a plan, but in order to do that they are going to have to swallow some pretty unpleasant medicine, and I don’t know whether the political situation will allow them to do that.”

Entitlements Need to be the Focus
“It is important to understand that although we talk about discretionary spending – the amount that is appropriated every year (we talk about that a lot) – it is not a large part of the budget. More than half of the budget if you include interest is mandatory spending or entitlements. It has to be spent because it is in the law, and it is not part of the annual budget process. But the spending projections (which are quite scary as you look ahead) are really driven by three major programs – especially Medicare and Medicaid, but also Social Security. Spending under those programs will rise faster than the economy can grow over the next few years. That is because the population is aging and because medical care is getting more expensive.

So we cannot allow those three programs to grow faster than the economy because that means we would be borrowing more and more. Revenues grow, at any set of tax rates, about as fast as the economy grows. So we have a growing wedge there and that is the whole problem. How to bring it together? It doesn’t mean that all of the spending restraint has to come from the entitlement programs. I don’t think it can. In an aging society with a taste for medical care, everybody wants it and it is getting better and better. We will inevitably spend an increasing proportion of our budget and our GDP on those types of programs – pensions and health care for the elderly – but it cannot go on increasing that fast. To the extent that it grows faster than revenues, we have got to find other ways of saving spending in the rest of the budget and, I believe, we have to raise revenues.”

Balancing the Budget Can be Done
“I am a veteran of a successful effort to balance the federal budget at the end of the 1990’s. It was a bipartisan effort. It started with the Budget Enforcement Act of 1990 which a Democratic Congress and a Republican President (President George H. W. Bush) put together, and that established some rules which were very effective. Then I was Budget Director early in the Clinton Administration and worked with the Congress – first a Democratic Congress then a Republican Congress – and we succeeded in getting the deficit to come down and turn it into a surplus. We ran a surplus in the budget for four years at the very end of the 1990’s and turn of the last century. It was a considerable achievement.

It is harder now because we are closer to the demographic surge. The retirement of the “baby-boom” generation is happening now and medical care spending has continued to rise. So it is a more difficult problem than it was at the end of the 1990’s, but I believe it can be done and that the proposals which will come out of these commissions will help. But in the end it is a matter of political will. It is a question of whether the Congress can act in a responsible way, and whether Republicans and Democrats can join in that effort because I do not think it can be done by one party or the other alone.”

Two Debt/Deficit Commissions
“I am actually on two commissions. One is the President’s and the other is a very exciting effort that I have been co-chairing with former Senator Pete Domenici from New Mexico whom I have worked with over the years. He is a Republican, I am a Democrat. This is a bipartisan effort sponsored by the Bipartisan Policy Center, and we have brought together a group of Republicans and Democrats with budget experience and public experience of a variety of sorts (a couple of Governors, a couple of Mayors, and other former public officials) and we have put together a plan which we think is a balanced answer to the problem of the rising debt. We have worked to make this available in advance to the President’s commission and shared some of the work of our excellent staff, so it hasn’t been a secret from them. We will launch it publicly on this coming Wednesday, November 17th.”