Monday, July 05, 2010

How to Fix US Deficit: Stick to the Law

According to the Christian Science Monitor, projections from the Congressional Budget Office on deficit assumptions show that if we stick to the current tax law, federal revenues should pay for spending over the next few decades. Check out the following opinion article by guest blogger Diane Lim Rogers explaining why the current tax law is in fact fiscally responsible.

I haven’t had a chance to digest CBO’s long-term outlook yet (released earlier today), but luckily I did see Ezra Klein’s post on it, which featured two charts highlighting the difference between CBO’s current-law baseline, and their “alternative fiscal scenario” which is more of a “policy-extended” baseline – similar to how the Obama Administration gauges their budget proposals.

As Ezra points out, current law, taken literally as CBO must assume, is fiscally responsible:

In theory, CBO’s deficit assumptions project the effects of settled law. And if you do that, revenues pretty much pay for spending over the next few decades.

Note that the chart shows that under CBO’s “extended baseline” scenario, reflecting current law, “primary balance” is achieved, where there is no “fiscal gap” between non-interest spending and revenues. That doesn’t mean the federal budget is perfectly balanced, because interest costs take total federal spending above revenues, but it does mean that the deficit is pretty small–as a matter of fact, less than 3 percent of GDP by 2015, which means it’s economically sustainable (because at 3 percent, the stock of federal debt is growing at about the same pace as the economy).

Coincidentally, this picture above could also be labeled “2015 Goal of President Obama’s Fiscal Commission”– because the commission’s goal is also to achieve “primary balance” and a “sustainable” level of deficits by 2015.

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