Are There Reasonable Approaches to Fiscal Consolidation?

According to the CBO, under the President’s budget, the deficit hovers around 2% of GDP, and debt-to-GDP stabilizes through 2023 at levels lower than today’s.

Hence, were the President’s budget to be implemented, the budget would be on a path to medium run stabilization. This point is illustrated in Figures 1 and 2 from the CBO report.

Source: An Analysis of the President’s 2014 Budget.

Source: An Analysis of the President’s 2014 Budget.

Now, it’s clear that with the Congress we have, it is highly unlikely that the President’s budget would be implemented. On the other hand, these scores (recalling that the Ryan House budget plans have never been “scored”, except by Heritage CDA) indicate that stabilization of debt-to-GDP ratios do not require draconian cuts to entitlements and discretionary spending.

Over the longer term, health care costs will push upward expenditures, and hence deficits (although by how much is now debatable [1] [2]) This is not a new concern; it was a concern back in 2001. But then, the outgoing (Clinton) Administration had hoped that a conservative fiscal policy could build up assets to support entitlement spending. Instead, the new administration in 2001 implemented tax cuts (and some discretionary spending in the form of Operation Iraqi Freedom), which resulted in a shifting forward the onset of the deficit. This is shown in Figure 5-5 from the 2010 Economic Report of the President:

Source: Economic Report of the President, 2010.

Whenever I look at this graph, I always wonder what the self-avowed fiscal conservatives of today were pushing in 2001; I’m guessing tax cuts. I also think about what we could have done in terms of stimulus in 2009-2011 had we not squandered trillions on tax cuts when close to full employment (as I observed on Econbrowser in 2006).

Update, 5/21, 11am Pacific: Reader William wonders about the use of the word “squandered”.Bruce Bartlett at Economix has a timely recounting of exactly how little benefit we as a country obtained from the tax cuts (surely some people benefitted a lot, but probably nobody I know personally). As Bartlett notes:

In 2011, the economist Alan Viard of the conservative American Enterprise Institute told Bloomberg News, “The effects of the Bush tax cuts on growth were ambiguous at best.” He added, “They were not much of a poster child for pro-growth tax policy.”

That should be the epitaph for the EGTRRA and JGTRRA.

This piece is cross-posted from Econbrowser with permission.