Budget enforcement plans not sufficient

The Administration’s “Failsafe” proposal would, beginning in 2014, ask: Is U.S. debt declining relative to our national income?   As a rule of thumb, this means annual deficits would have to average less than around three percent of GDP. 

If they don’t, then the Failsafe provision would unleash across-the-board tax increases and some spending reductions.  I say “some” because the Failsafe plan excludes most of the federal budget – Social Security, Medicare, and all income support programs.  Meanwhile, all so-called tax expenditures appear to be on the table, including reductions to the mortgage interest deduction. 

Waiting until 2014 to implement budget enforcement plans is too long and targeting deficits is not an effective means of reducing spending. We tried them in the 1980s and they didn’t work. Moreover, any enforcement plan that exempts most spending effectively ignores most of the problem.  It’s a case of too late and too little.

More intriguing is SAVEGO, which has more teeth than the Administration’s proposal.  It begins two years sooner, has caps on discretionary spending, and covers most federal spending.  , including the health programs that are the source of most of our unfunded liabilities.  (Only Social Security may be exempted.)  

The plan divides the budget into three spending buckets – discretionary, health and other mandatory programs.  The approach on discretionary is simple. It imposes caps over the next ten years, which could result in about half of the plan’s savings target of $4.2 trillion. 

The approach for health and other mandatory programs is less clear.  Congress would establish “savings” targets, and then would enact legislation to meet those savings.  If lawmakers fail to act, across-the-board cuts would take place to meet the targets.  These cuts would be limited to programs within each bucket but they could include so-called related tax expenditures. For example, if Congress fails to meet the savings target for the health bucket one year, the White House’s Office of Management and Budget would step in and achieve the required savings through health-related spending cuts and/or health-related tax increases. 

So like the Administration’s plan, SAVEGO equates tax increases with spending cuts. That’s a mistake.  As economists have observed, countries in our situation that focused on reducing spending succeeded more often than those that tried to tax their way out of the problem.

Moreover, like the Administration, SAVEGO seeks to “stabilize” U.S. debt levels rather than the more concrete goal of a balanced budget. 

The key question for policymakers to ask is which plan is more likely to compel Congress to restrain spending?  The implications of SAVEGO are not clear.  If Congress is unable to move, does spending get cut?  Do taxes go up?  Does Congress just waive the requirement?  Complexity is a proxy for inaction, and the SAVEGO proposal is likely to fail to address the underlying challenge. 

We need a plan that simplifies all this. That is The One Cent Solution. 

First, we put strict caps on government spending, so that every federal dollar is reduced by one cent each year for five years.  At the end of that time, we cap overall spending at the level where we expect revenues to be.  

Second, Congress would enact legislation to bring federal spending under the overall caps.  That means reducing discretionary spending and reforming our entitlement programs.  

Third, if Congress fails to act, then across-the-board spending cuts would annually make certain that spending stays within the One Cent Solution guidelines.  Every program would be subject to the cuts, not just some, so it’s a real incentive for Congress to act.

We need a solution that makes sense and is sustainable. We need the One Cent Solution. To learn more, visit www.onecentsolution.org. 

Bruce Cook is chairman and CEO of Citizens for Restoring America’s Financial Future.  A graduate of Georgia Tech and Harvard Business School, Cook owns an educational and training company and has been active in Georgia state government.