Deficit Reduction a Complex Challenge

Details: 22 July 2011

As the Obama administration and members of Congress continue to deal with the double dose of difficulty presented by deficits and debt, the complexity and extent of the challenge cannot be over-appreciated.

Regardless of how we might judge the mixture of causes of the current crisis, the reality is that decision makers are confronting incredibly difficult economic, political and moral decisions and choices. The stakes are high, not just politically, but because deficits and the debt stemming from them threaten the economy and burden future generations.

In letters to members of both the U.S. House of Representatives and the Senate, representatives of the United States Conference of Catholic Bishops expressed this sentiment: "We also wish to clearly acknowledge the difficult challenges that the Congress, Administration and government at all levels face to get our (nation’s) financial house in order: fulfilling the demands of justice and moral obligations to future generations, controlling future deficits and debt; and protecting the lives and dignity of those who are poor and vulnerable."

The debt limit is the most immediate challenge and priority. It is the total amount the federal government is authorized to borrow in order to meet existing obligations, such as Social Security, Medicare benefits, military salaries, tax refunds and approximately $200 billion per year in interest. Without action, the nation’s debt is predicted to bust through the current ceiling of $14.3 trillion Aug. 2. That’s the deadline. If nothing changes, then on Aug. 3, due-and-payable obligations would substantially exceed available funds, resulting in a U.S. government default, an unprecedented, historical event. The ceiling has been raised before, several times. Failing to do so now would create severe economic consequences in the U.S. and around the world.

A soft solution—but what might ultimately happen, given the political gridlock—would be to merely increase the debt limit again, on a short term basis, in order to dodge the default. In other words, boost the number and carry that "fix" ahead some.

That would be inopportune if not irresponsible, because key players from both sides of the political isle realize that the debt is an accumulation of annual deficits (e.g., $1.5 trillion) and that deficit reduction is essential. But will there be meaningful action? Is there a politically achievable plan for this serious problem?

Deficits are reduced by decreasing spending or by increasing revenue, or by a combination of both. Republicans say, generally, that any tax increases are a deal breaker. Democrats, including the President say, generally, that cuts in entitlement programs, such as Social Security, Medicare and Medicaid, are a deal breaker.

The United States Conference of Catholic Bishops, while underscoring the importance of fiscal responsibility and the need to address the budget deficit, calls for a balanced and inclusive approach, shared sacrifice by all, including raising adequate revenues, eliminating unnecessary spending and addressing the long-term costs of health insurance and retirement programs fairly. The Bishops are by no means alone in calling for a balanced approach; other denominational leaders and advocates for the poor and vulnerable are expressing similar encouragements.

Within the context of deficit reduction, particularly as it pertains to program cuts, the Bishops urge adherence to three moral principles: that every budget decision should be evaluated by whether it protects or threatens human life and dignity; that the needs of those who are hungry or homeless, without work, or in poverty should be first priority—preferential option for the poor—and programs for these should be protected (certainly not disproportionately cut); and that government and other institutions have a shared responsibility to promote the common good of all, especially ordinary workers and families struggling to live in dignity during difficult economic times.

To a significant extent, a balanced approach would have spending reductions and revenue increases that are close to equal, with as much of the latter as feasible coming from tax-code reforms that close loopholes and as much of the former as feasible from entitlement reforms that reduce inefficiencies; in other words, reductions in tax expenditures (currently $1 trillion per year) as well as program expenditures. There are policy decisions in these contexts that would draw bi-partisan support, surely. Nevertheless, tax-rate adjustments might be necessary in order to protect the poor and vulnerable from unjust and disproportionate cuts as the process of producing meaningful deficit reduction unfolds.

And finally….

According to information released by the Chairman of the U.S. Senate Committee on Appropriations, Senator Daniel Inouye, revenues, adjusted for inflation and population growth, are down 18 percent from Fiscal Year 2001. Moreover, as a percentage of Gross Domestic Product—now 14.8 percent—revenues are at their lowest level in 60 years.

According to a think tank, the Center on Budget and Policy Priorities, almost all successful deficit reductions enacted over the past 30 years—1982, 1984, 1987, 1990 and 1993—have had revenue increases as important ingredients.