A Look at the New Simpson-Bowles Plan

February 22, 2013 at 2:20 pm

Robert Greenstein and Joel Friedman issued a commentary today on the new deficit-reduction proposal by fiscal commission co-chairs Alan Simpson and Erskine Bowles.  Here’s an excerpt:

The new deficit-reduction plan that Alan Simpson and Erskine Bowles issued this week calls for $2.4 trillion of additional deficit reduction over the next ten years (through 2023), with roughly $2.1 trillion in policy changes and about $300 billion in resulting interest savings.  Of the policy savings, about $700 billion would come from higher revenues — a combination of tax reform and applying the “chained CPI” to the indexing of the tax code — while $1.4 trillion would come from program cuts.  Thus, the budget cuts would be about twice as large as the revenue increases.

These policy changes would come on top of the deficit reduction that policymakers have enacted over the last two-plus years, which has relied much more heavily on program cuts than revenue increases.  When coupled with those enacted measures — most notably the 2011 Budget Control Act (BCA) and the recent “fiscal cliff” deal — the new Simpson-Bowles plan would result in total spending cuts of nearly $3 trillion and revenue increases of about $1.4 trillion over the ten years from 2014 through 2023.

To their credit, Simpson and Bowles have made it a core principle from the outset that deficit reduction should not increase poverty or harm the disadvantaged.  They indicated this week that when they release the programmatic details of their new plan in a few weeks, it will include some measures to support this goal that weren’t part of their original December 2010 plan (which they issued as co-chairs of President Obama’s fiscal commission).  The material they released this week also states: “Broad-based entitlement reforms should either include protections for vulnerable populations or be coupled with changes designed to strengthen the safety net for those who rely on it the most.”  This principle deserves widespread support.

We await the policy details that will fill out their new plan.  But, we do so with serious concerns.  Compared to the original Simpson-Bowles plan, the new plan shrinks the revenue contribution to deficit reduction in half, while enlarging the cuts in health-care programs….

Bowles told the Washington Post’s Ezra Klein that he and Simpson lowered the revenue contribution in their new plan so that, when combined with the revenue enacted in the “fiscal cliff” bill, it wouldn’t exceed the pared-back revenue level in President Obama’s last offer to House Speaker John Boehner on December 17, before their talks collapsed.  But, as Klein noted in his interview with Bowles, the new plan pairs the final Obama revenue offer with a level of spending cuts that exceeds what Speaker Boehner sought in his final offer. 

It seems unlikely that the plan’s $1.4 trillion in additional budget cuts could be achieved without increasing poverty or the number of people without health insurance, and without weakening investments in education, infrastructure, and basic research that are important to future economic growth….  In our view, either the revenue contribution should be significantly higher than in the new Simpson-Bowles plan or the target for the amount of deficit reduction being sought now should be lower.

Simpson and Bowles note that policymakers would need to achieve $2.4 trillion in deficit reduction to shrink the national debt to less than 70 percent of gross domestic product (GDP) by the end of the decade.  As a recent CBPP analysis found, $1.5 trillion in deficit reduction would stabilize the debt as a share of GDP over the coming decade at about its current level of 73 percent of GDP.  The larger amount of deficit reduction would be desirable if policymakers can secure it through sound, balanced policies that do not impede the economic recovery or jeopardize future productivity growth by providing inadequate resources for areas like education, infrastructure, and basic research; do not increase poverty and inequality or the number of people who are uninsured; and do not sacrifice health-care quality or raise overall U.S. health care costs.  We are concerned that the new Simpson-Bowles plan, with its large additional cuts in NDD and health care programs, will not meet these tests.

Stabilizing the debt-to-GDP ratio over the decade is crucial.  But it’s important to note that there is no magic to Simpson’s and Bowles’, or any other lower, debt-to-GDP ratio target; there is no economic evidence that a specific debt-to-GDP ratio — or that putting the debt-to-GDP ratio on a declining path this decade — is required to ensure a healthy economy.  Any specific ratio target is essentially an arbitrary one, as the International Monetary Fund has noted.

Click here for the full commentary.

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