Prepared Statement of Alice Rivlin before the National Commission on Fiscal Responsibility and Reform Meeting on America’s Fiscal Challenges
I am honored to have served on this Commission and I support the Co-Chairs’ plan described in “The Moment of Truth.” I admire the Co-Chairs for their unstinting efforts to reconcile competing ideologies and craft a plan that will control future debt and help restore American prosperity. Compromise is necessary to avoid deadlock and solve otherwise intractable problems. The co-chairs have done a remarkable job of engineering a credible compromise without retreating from the problem.
The federal budget is on an unsustainable path. Decisions made over many years by both parties have created spending commitments that will rise faster than the economy or federal revenues can grow. Without a radical shift in policies, the gap between spending and revenues will continue to widen even after the economy recovers from the recession, as the baby boom generation retires, people live longer, and the cost of medical care continues to escalate. We will not be able to borrow at projected rates.
If we do not act soon to rein in future deficits, we will destroy America’s prosperity and capacity for leadership. Faith in the safety of U.S. Treasury bonds has allowed us to borrow huge sums in world markets at low rates. It has also made us dependent on foreign creditors and vulnerable to shifts in their confidence. Loss of creditor confidence could lead to a rapid fall in the value of the dollar, a spike in interest rates, and a far more serious recession than the current one. It is impossible to tell when a loss of confidence will occur, but when it does it will be too late to act. We need to take aggressive steps to control the growth of debt before catastrophe occurs.
The economic damage from a debt crisis will hurt all Americans, especially those with low incomes. The plan seeks to control the debt without injury to the most vulnerable, but it also recognizes that a debt crisis could trigger a deep, prolonged recession. The poor and low-wage earners suffer most in a downturn and have the greatest stake in averting a debt crisis.
Putting the budget on a sustainable path requires bipartisan action both to reduce the growth of spending and to increase revenues. All the possible actions to control debt are unpopular. Fierce opposition greets any attempt to raise revenues or reduce spending. The only feasible way to control the debt is for both parties to agree on a compromise plan reflecting tough choices. This Commission has spent many hours in civil discourse about the difficult options for controlling debt. The Co-Chairs have distilled those discussions into a credible compromise plan that deserves the support of the Commission and can form the basis for legislative action. It also holds the promise of improving the efficiency of government, directing spending to higher priorities, and creating a simpler, fairer, and more pro-growth tax system.
Like all my fellow Commissioners, I have strong views and would have preferred a somewhat different mix of policies. I believe the recovery is still fragile and that an immediate payroll tax holiday would help ensure more robust growth. I would have shifted the plan’s overall balance more toward revenue increases and less toward spending cuts. I worry that cutting discretionary spending sharply as soon as FY 2013 may slow the recovery. While I applaud the drastic simplification and reform of the income tax proposed in the plan, I believe that a broad-based consumption tax is also needed to fund federal spending as the population ages and America modernizes its infrastructure to stay productive and competitive. I do not believe it is wise or even feasible to cap federal revenues at 21 percent of GDP.
Despite the fact that the mix of policies differs somewhat from my personal preferences, I strongly support the compromise plan, because I believe bipartisan compromise is necessary to avoid debt crisis and create a stronger America.