Reducing the Budget Deficit: The President’s
Fiscal Commission and Other Initiatives
Mindy R. Levit
Analyst in Public Finance
April 29, 2011
Congressional Research Service
7-5700
www.crs.gov
R41784
CRS Report for Congress
P
repared for Members and Committees of Congress
Reducing the Budget Deficit: The President’s Fiscal Commission and Other Initiatives
Summary
The federal budget is on an unsustainable path. Though deficit levels are currently elevated, they
are expected to fall towards the middle part of the decade as the economic recovery continues.
Looking beyond this decade, however, the country’s fiscal outlook becomes more bleak as
spending on programs like Social Security, Medicare, and Medicaid, and net interest are projected
to consume a larger portion of the total federal budget.
Budget policy debates thus far in the 112th Congress have centered on how to achieve meaningful
deficit reduction and implementation of a plan to stabilize the federal debt. Various views and
opinions exist about how to improve the long-term fiscal outlook, specifically centered around
which programs should be prioritized or sacrificed. Delays in taking corrective action will
exacerbate the size of the changes that need to be made. At the extreme, if no actions are taken,
the United States risks a significant economic crisis and the government may be limited in its
ability to address these challenges.
Any choices that are made to address the budgetary imbalances have important economic, social,
and generational impacts in the present and the future. In order to undertake any substantive
changes to the federal policies and programs, sacrifices to favored programs and increases in
taxes will likely be required. The sacrifices made today are essential to minimizing the size of
potential programmatic cuts or tax increases, reducing the probability of a future crisis, and
ensuring an improved standard of living for future generations.
A number of groups have published reports detailing possible ways that the country can put itself
on a more sustainable fiscal path. Though the fiscal reform plans differ, they all have several
things in common. They recommend that implementation of their plans largely begin in FY2012,
with the goal of stabilizing the debt at 60% of GDP near the end of the decade. Over the longer-
term, they all provide plans to reduce this ratio further. Some of the reports focus on specific
policy options that are available, while others focus on issues of accountability and transparency
in the budget process. Some plans also recommend implementing additional, immediate short-
term stimulus that would increase the deficit before calling for deficit reduction.
President Obama created a bipartisan fiscal commission tasked with putting the nation on a
sustainable fiscal path. The commission had two main goals: balancing the budget excluding net
interest payments by FY2015 and examining ways to achieve fiscal sustainability over the long
run. The Fiscal Commission’s final report contained recommendations that would 1) reduce the
deficit by a combined $4 trillion by FY2020; 2) lower the budget deficit to 2.3% of GDP by
FY2015; 3) reduce tax rates and tax expenditures; 4) cap revenue collection at 21% of GDP; 5)
ensure the solvency of Social Security; and 6) reduce the federal debt to 60% of GDP by FY2023
and 40% by FY2035. In order to achieve these savings, the plan includes cuts to both security and
non-security discretionary programs, health care cost containment, additional mandatory savings
through cutting agriculture subsidies and the civil service retirement system, Social Security
reforms, comprehensive tax reform, and budget process changes.
This report discusses why the federal government’s fiscal path is unsustainable and provides an
overview of proposals of selected groups that have published detailed recommendations on how
to return the federal budget to a sustainable course.
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Reducing the Budget Deficit: The President’s Fiscal Commission and Other Initiatives
Contents
Federal Budget Outlook .............................................................................................................. 1
What is Fiscal Sustainability?................................................................................................ 2
Short-Run Issues ................................................................................................................... 2
Long-Run Issues ................................................................................................................... 3
Recent Developments............................................................................................................ 4
Framing the Issues and Evaluating the Tradeoffs ......................................................................... 4
Social Effects ........................................................................................................................ 5
Economic Effects .................................................................................................................. 6
Generational Effects.............................................................................................................. 7
Work of Fiscal Reform Groups.................................................................................................... 7
National Commission on Fiscal Responsibility and Reform................................................... 8
Galston-MacGuineas Plan................................................................................................... 12
Peterson-Pew Commission on Budget Reform .................................................................... 14
NRC/NAPA Committee on the Fiscal Future of the United States ........................................ 15
The Debt Reduction Task Force .......................................................................................... 17
Other Groups ...................................................................................................................... 19
Tables
Table 1. Summary of Fiscal Commission Plan............................................................................. 9
Table 2. Summary of Galston-MacGuineas Plan........................................................................ 12
Table 3. NRC/NAPA Proposals for Four Paths to Achieving Fiscal Sustainability ...................... 16
Table 4. Distribution of DRTF’s Changes to Spending and Revenue .......................................... 18
Contacts
Author Contact Information ...................................................................................................... 20
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Reducing the Budget Deficit: The President’s Fiscal Commission and Other Initiatives
he federal budget is on an unsustainable path as a result of projected federal debt levels
that will continue to grow relative to the size of the economy. In recent years, federal debt
T has increased as a result of elevated budget deficits attributed to the economic downturn
and the policies enacted to accelerate economic recovery. Under baseline assumptions, deficit
levels are expected to fall towards the middle part of the decade, as the economy recovers, before
rising again by the end of the decade. If these baseline assumptions are altered to more closely
match actual policy, the deficit shows the same pattern with less improvement in the near term.
Beyond this decade, however, the federal government’s fiscal outlook becomes bleaker as
spending on mandatory programs, such as Social Security, Medicare, and Medicaid, and net
interest consume an increasing portion of the total federal budget resulting in very large increases
in federal debt.
Various views and opinions exist about how to change the long-term fiscal outlook, specifically
concerned with which programs should be prioritized or sacrificed. Because known imbalances
already exist between spending and revenue over the long term, delays in taking corrective action
will exacerbate the size of changes needed to return to fiscal sustainability, with greater sacrifices
facing programs and individuals when the imbalance is addressed. At the extreme, if no action is
taken, the United States will likely face a significant economic crisis.
This report provides an explanation of why the federal government’s fiscal path is unsustainable,
a brief overview of the short- and long-term outlook for the federal budget, and a discussion of
the framework and tradeoffs in which to consider proposed policy options to make the budget
sustainable. Finally, this report briefly discusses the proposals of selected groups that have
published detailed recommendations on how to return the federal budget to a sustainable course.
Federal Budget Outlook
In recent years, the budget deficit, the difference between spending and revenues, has
significantly exceeded economic growth. If the budget deficit exceeds economic growth for a
sustained period, a variety of problems could result. These include a lower national saving rate,
higher interest rates, and higher levels of inflation. Moreover, budget deficits add to the level of
national debt, as additional borrowing is needed to finance the gap between spending and
revenues.1 Doing nothing to combat the country’s deficit and rising debt levels can lead to more
severe problems over the long term, including the potential for the United States government to
default on its obligations. As the debt grows, the nation relies on the willingness of investors to
buy it. If investors lose confidence in the ability of the United States to bring its fiscal house
under control, at some point they would no longer be willing to continue buying debt and
financing the budget deficit except at very high interest rates.2 Consequently, the longer that
1 In this report, discussion of federal debt refers to debt held by the public, unless otherwise noted. The other portion of
gross (or total) debt is intragovernmental debt, what is owed by one part of the government to another, which has no
effect on the economy. For more information, see CRS Report RL30520, The National Debt: Who Bears Its Burden?,
by Marc Labonte.
2 On April 18, 2011, Standard & Poor’s revised their outlook on the long-term rating of U.S. debt from stable to
negative due to “very large budget deficits and rising government indebtedness” and an unclear path to addressing
these issues. Though this did not represent a downgrade of the U.S. credit rating, it does provide an indication of how
the financial markets view the current U.S. budget outlook. Standard & Poors, “'AAA/A-1+' Rating On United States of
America Affirmed; Outlook Revised To Negative”, April 18, 2011, available at
http://www.standardandpoors.com/ratings/articles/en/us/?assetID=1245302886884&intcmp=239.
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policymakers wait to improve the fiscal outlook, the larger changes will likely have to be, the
greater the risk of a lack of investor confidence, and the more likely the a risk of a severe
financial crisis.
What is Fiscal Sustainability?
Whether or not the federal budget is fiscally sustainable is generally measured by the annual
changes in the ratio of debt held by the public-to-GDP (hereafter referred to as debt-to-GDP
ratio). Budget deficits will generally increase the level of total federal debt. If the budget is in
surplus, total federal debt will generally fall.3 Temporary increases in the debt-to-GDP ratio are
not necessarily problematic. However, if the debt-to-GDP ratio is persistently rising, it is
considered unsustainable. If GDP growth equals or exceeds the annual budget deficit as a
percentage of GDP, meaning that the debt-to-GDP ratio would generally remain constant or fall,
then the budget is considered sustainable.
The issue of fiscal sustainability has gained prominence due to the significant increases in the
debt-to-GDP ratio over the last several years as a result of the recession and financial crisis and
the projected increases over the long term. In FY2007, the debt-to-GDP ratio stood at 36.2%. At
the end of FY2010, the debt-to-GDP ratio stood at 62.1%, and is projected by CBO to rise to
87.4% by FY2021, under the President’s proposed budget.4 While there is no level of debt-to-
GDP that is universally regarded as optimal, some budget reform proposals recommended
maintaining the debt-to-GDP ratio at 60% or less going forward.
Two sets of policy issues currently affecting the size of the budget deficit and the federal debt:
economic recovery and related policies in the short run and imbalances in retirement and
healthcare programs in the long run.
Short-Run Issues
The economy is still recovering from the most recent recession, which lasted from December
2007 to June 2009.5 During this period, the federal budget deficit rose from 1.2% of GDP in
FY2007 to 9.9% in FY2009. The budget deficit remained elevated at 8.9% of GDP in FY2010.
Debt held by the public rose from 36.2% of GDP at the end of FY2007 to 62.1% of GDP at the
end of FY2010.6 The budget deficit grew primarily for two reasons: 1) government actions taken
to combat the economic downturn; and 2) significantly lower revenue and higher spending levels
directly attributable to the economic conditions.
3 The level of “gross” or total federal debt is comprised of debt held by the public (the cumulative amount that the
government has borrowed to finance its budget deficits) plus intragovernmental debt (what the government owes to
itself). Total debt can rise under a budget surplus if the increase in intragovernmental debt exceeds the level of the
surplus.
4 U.S. Congressional Budget Office, Preliminary Analysis of the President’s Budget for 2012, March 2011, Table 1,
available at: http://www.cbo.gov/ftpdocs/121xx/doc12103/2011-03-18-APB-PreliminaryReport.pdf.
5 National Bureau of Economic Research, “US Business Cycle Expansions and Contractions”, available at:
http://www.nber.org/cycles/cyclesmain.html.
6 U.S. Congressional Budget Office, Historical Tables, Table F-2, available at:
http://www.cbo.gov/ftpdocs/108xx/doc10871/HistoricalTables.pdf.
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Generally, as debt rises, the portion of the federal budget devoted to interest payments on it also
rises, leaving fewer resources to finance other priorities. As federal debt continues to accumulate,
interest payments are generally expected to rise especially as the economic recovery continues
and interest rates increase. Even if the current level of federal debt were to remain stable, interest
payments, or the cost of holding that debt, would still need to be made on the debt that has
already been issued. Even at a stable level of debt, interest payments could still increase if
maturing debt is refinanced at higher interest rates.
In the short term, continued economic recovery will lead to decreases in the budget deficit
relative to its current level. Revenues will automatically increase as unemployment falls and
spending will automatically decrease due to less reliance on federal programs meant to provide
assistance during economic downturns. The deficit is not projected to decline enough to stabilize
the debt relative to GDP, however. Though many argue that fiscal stimulus and other actions were
needed to help the economy recover, accumulated large budget deficits and resulting high debt
levels will have an effect for many years.
Long-Run Issues
In the long run, the United States faces several major challenges. Most budget analysts agree that
federal spending on healthcare is the largest contributor to the nation’s long-term fiscal
challenges. This is largely due to projections that the rapid growth in healthcare costs will
continue in the future.7 In addition, benefits owed to future retirees under the Social Security
program are growing out of balance with the revenue stream that finances the program.
The Congressional Budget Office (CBO) projects that, under certain assumptions, federal
spending on major health programs, Social Security, and net interest payments alone could
exceed the revenues collected by the federal government in 2024.8 This scenario would mean
that, without increasing revenues or altering spending patterns, federal outlays other than for
these programs would need to be deficit financed. In other words, if policy were simply allowed
to continue on its current path after the economy recovers, there could be a significant structural
deficit that would be difficult to overcome without programmatic reforms.
In the absence of changes to correct this future imbalance between spending and revenue, there
would likely be negative effects on future living standards and the economy and an increased
likelihood of a financial crisis. If current policy is maintained and long-run deficits remain high,
interest rates on U.S. Treasury bonds would likely rise substantially, both as a result of the higher
risk that the Treasury might ultimately default on the debt and as a result of the government's
demand for borrowed funds. If the government financed its rising budget deficit by increasing the
money supply, inflation and interest rates would also increase significantly. Higher interest rates,
in turn, make investment more expensive, causing economic growth to slow and ultimately
leading to lower U.S. living standards.9 CBO estimates that, by 2035, the deficits resulting from
current policy would reduce GDP by 15% relative to what it would have been.10
7 It is unclear whether the recently enacted health reform legislation will control costs over the long term. See U.S.
Government Accountability Office, The Federal Government’s Long-Term Fiscal Outlook, January 2011, available at:
http://www.gao.gov/new.items/d11451sp.pdf.
8 CRS calculations based on U.S. Congressional Budget Office, The Long Term Budget Outlook, June 2010, Data
Underlying Scenarios and Figures, available at: http://www.cbo.gov/ftpdocs/115xx/doc11579/LTBO-2010data.xls.
9 U.S. Congressional Budget Office, For more information, see CRS Report RL32747, The Economic Implications of
(continued...)
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Recent Developments
Budget policy debates thus far in the 112th Congress have centered on how to achieve meaningful
deficit reduction and implementation of a plan to stabilize the federal debt. On April 5, 2011,
Representative Paul Ryan, the Chairman of the House Budget Committee, released a report
entitled “The Path to Prosperity: Restoring America's Promise,” which provided a plan to
stabilize the federal debt.11 Under the assumptions in Chairman Ryan’s plan, the deficit would be
reduced by $1,649 billion relative to the CBO current law baseline over the FY2012 and FY2021
period.12 If all of his proposals are implemented, fiscal sustainability would be achieved by
roughly FY2030 with a declining debt-to-GDP ratio thereafter.13
Though no formal proposal has been introduced in the Senate, a group of six senators, known as
the “Gang of Six”, has been working on formulating a bipartisan deficit reduction proposal. This
proposal is expected to be released in Spring 2011.
On April 13, 2011, President Obama released a deficit reduction proposal that would include
spending cuts and tax reform.14 The proposal also included a “Debt Failsafe” trigger that would
require a debt-to-GDP ratio that is stabilized by FY2014 and declining thereafter. If this is not
achieved, the trigger would automatically initiate across the board spending cuts and reductions in
tax expenditures (i.e., broadening the tax base and raising revenue).
Framing the Issues and Evaluating the Tradeoffs
Budgets are a reflection of the nation’s priorities and allocate limited resources. To achieve fiscal
sustainability, cuts or reductions to favored programs and increases in taxes will likely be
required. Spending and tax law changes made in the near-term can reduce the probability of a
future crisis and help ensure an improved standard of living for future generations.
Many federal programs help the elderly and the poor. In FY2010, federal spending on Social
Security, and the major mandatory federal healthcare programs, including Medicare and
Medicaid, accounted for 43% of all federal spending. Spending on income support programs, like
unemployment compensation and the Supplemental Nutrition Assistance Program (SNAP),
accounted for an additional 12% of all federal spending.15 Under certain assumptions, spending
on federal health programs is expected to exceed total revenue collected by the middle of the
(...continued)
the Long-Term Federal Budget Outlook, by Marc Labonte.
10 U.S. Congressional Budget Office, The Long Term Budget Outlook, June 2010, p. 19.
11 The Path to Prosperity: Restoring America's Promise can be found at:
http://budget.house.gov/UploadedFiles/PathToProsperityFY2012.pdf.
12 This is relative to the CBO March 2011 baseline, which is different than the baselines used to measure deficit
reduction under other proposals discussed later in this report.
13 U.S. Congressional Budget Office, Long-Term Analysis of a Budget Proposal by Chairman Ryan, Table 1, available
at: http://www.cbo.gov/ftpdocs/121xx/doc12128/04-05-Ryan_Letter.pdf.
14 The proposal can be found at: http://www.whitehouse.gov/the-press-office/2011/04/13/fact-sheet-presidents-
framework-shared-prosperity-and-shared-fiscal-resp.
15 U.S. Congressional Budget Office, The Budget and Economic Outlook: An Update, Aug 2010, Tables 1-2 and 1-4,
available at: http://www.cbo.gov/ftpdocs/117xx/doc11705/08-18-Update.pdf.
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century.16 In the absence of changes made to these and other programs, spending devoted to many
national priorities, such as defense, education, the environment, or energy, will either be deficit
financed or require significant increases in revenues.
Budgetary choices, particularly centered around the magnitude of changes that would be required
to return to fiscal sustainability, have important economic, social, and generational impacts in the
present and the future.
Social Effects
Certain federal programs are specifically aimed at reducing income inequality. However, because
spending on many of these programs, known as mandatory or direct spending, occurs
automatically without explicit congressional action, mandatory spending is harder to control on
an annual basis. Mandatory spending currently comprises roughly 60% of the federal budget.
Because of the nature of mandatory programs, changes in spending levels can vary significantly
with the economic cycle as more people come to temporarily rely on certain benefits. Spending
on these “automatic stabilizers” is intended to counteract economic downturns by providing
benefits, such as unemployment insurance and income support programs, to a greater segment of
the population. This additional spending during these periods causes deficits to increase or
surpluses to shrink. However, increases in outlays as a result of economic downturns may do
more to alleviate the effects of an economic downturn than other types of spending.
Mandatory spending is projected to increase as a share of the total budget over time, mainly due
to rising healthcare costs.17 These programs represent one of the largest burdens to future federal
spending and will likely have to be curtailed to meaningfully address these budgetary issues.
Cutting these federal benefits by means of curtailing mandatory spending may also result in harm
to vulnerable members of society.
Similar to the social effects of spending programs discussed above, tax policy also plays a role in
reducing income inequality and affects the deficit. The distribution of the federal tax burden is a
perennial topic of concern and debate. Economic theory does not provide an answer as to how the
tax burden should be distributed among people with unequal incomes. A consensus seems to have
evolved that the federal tax system should be progressive, a goal that, over time, has been
achieved.18
During times of economic downturn, tax revenues tend to fall. When the economy is performing
well, tax collections tend to increase. Given the current concerns with the level of federal debt,
evaluating changes to tax policy may be necessary. Economists evaluate the relative merits of tax
policies using the concepts of economic efficiency and equity. Tax systems that maximize
economic efficiency oftentimes do not have desirable distributional (equity) consequences.
Generally speaking, tax revenues can be enhanced by increasing tax rates or by eliminating
16 CRS calculations based on U.S. Congressional Budget Office, The Long Term Budget Outlook, June 2010, Data
Underlying Scenarios and Figures, available at: http://www.cbo.gov/ftpdocs/115xx/doc11579/LTBO-2010data.xls.
17 Mandatory spending includes federal government spending on entitlement programs as well as other budget outlays
controlled by laws other than appropriation acts. For more information, see CRS Report RL33074, Mandatory
Spending Since 1962, by D. Andrew Austin and Mindy R. Levit.
18 For more information, see CRS Report RL32808, Overview of the Federal Tax System, by Molly F. Sherlock and
Donald J. Marples.
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various exemptions, deductions, and credits available under the current tax code (i.e., broaden the
tax base).19 While making changes to the tax code may be desired to increase revenue collection,
it may increase the tax burden on individual societal groups that may be less able to afford it.
Others argue that certain changes to the tax code may increase the tax burden on groups that can
afford it, but are also the source of economic activity and therefore should not have to bear the
burden of a tax increase.
Economic Effects
Budget policy can play a strong role in determining long-run economic circumstances for
individuals and the government. Every dollar of income can be either spent or saved to be spent
later. National saving is measured by private saving (the saving of individuals) plus public saving
(the budget surpluses or deficits). Because a budget deficit represents negative public saving, it
lowers the national saving rate. In order to sustain large budget deficits, the economy requires
some combination of higher private saving, lower investment, and higher borrowing from abroad.
A low or negative national saving rate has economic consequences. If private saving is
inadequate, the government may be required to fill the gap where an individual did not adequately
save for retirement, potentially increasing budgetary imbalances. If public saving is insufficient
(i.e., there is a budget deficit), the government will have to sell Treasury securities to domestic
and foreign investors to fill the gap. Some economists have argued that borrowing much more
from abroad is unrealistic, and the already-heavy U.S. reliance on such borrowing makes the
maintenance of a large deficit even less sustainable.20 However, negative public saving (i.e.,
budget deficits) is not necessarily a problem if, for example, spending is used to finance national
investments.21 On the other hand, running sustained periods of negative saving, whether in the
private or public sector, could harm long-term growth. It is difficult to find the optimal match
between saving and investment.22
Generally economic theory indicates that higher levels of government borrowing will compete
with other potential uses of the same capital, including private investment. If domestic public
investment crowds out domestic private investment, fewer resources would be available to grow
the capacity of the private sector. Higher levels of borrowing could lead to increases in interest
rates, which would increase the costs of borrowing for everyone. An increase in interest rates
could reduce investment over time. Diverting productive capital from private investment would
reduce total economic output in the long run. If negative government saving leads the federal
government to collect more from individuals and businesses, via higher taxes as a percentage of
GDP in order to finance higher debt service costs, the government would control more of the
country’s resources, leaving a lower proportion available to the private individuals and
businesses.
19 For more information, see CRS Report R41641, Reducing the Budget Deficit: Tax Policy Options, by Molly F.
Sherlock.
20 For more information, see CRS Report R40770, Economic Effects of a Budget Deficit Exceeding $1 Trillion, by
Marc Labonte.
21 Currently, total federal capital investment is much smaller than the budget deficit. U.S. Office of Management and
Budget, Budget for Fiscal Year 2012, Historical Tables, Table 9.1, available at:
http://www.whitehouse.gov/omb/budget/Historicals/.
22 For more information, see CRS Report RS21480, Saving Rates in the United States: Calculation and Comparison, by
Craig K. Elwell.
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Generational Effects
Budget deficits, the resulting debt, and future payments on that debt force future generations to
pay for those things that the country is unwilling to pay for now. That is, the burden of the
national debt is largely shifted towards future generations. As a result of the national debt and
associated interest payments, future generations will likely face a reduction in economic output
and lower levels of real income. Generally, economic theory indicates that the reduction of output
in the future constitutes the burden of the national debt, which is borne largely by future
generations.23
Other imbalances in government spending can also have effects on future generations. As the
retirement of the baby boom generation begins, an increasingly larger portion of the population
will be over 65. For programs like Social Security and Medicare, the amount of benefits paid to
older Americans will exceed the amount of revenue collected from current workers. The assets
held in these programs’ trust funds, which presently contain surpluses, will be drained in order to
pay benefits. In order to correct this imbalance, future benefits will have to be reduced or other
sources of funding will have to be used to pay full benefits. If policymakers wait until trust funds
are depleted to alter programs, the costs (whether in the form of higher taxes or lower spending)
will be solely borne by future generations.
Work of Fiscal Reform Groups
Many budget analysts are concerned about future levels of federal debt and acknowledge that the
current spending and revenue collection cannot continue at current or projected future levels. A
number of groups have published reports detailing possible ways that the federal government can
put itself on a more sustainable fiscal path. These recommendations are not without the tradeoffs
discussed earlier in the report. The longer that the country continues without a plan to stabilize its
fiscal future, the more costly reform will be and the more plausible that reforms will be forced, as
a result of a severe fiscal crisis, rather than well-planned. None of the recommendations in any
plan can proceed without legislative action.
Though the fiscal reform plans discussed here differ, they all have several things in common.
They propose that implementation of their recommendations beginning around FY2012, with the
goal of stabilizing the debt at 60% of GDP near the end of the decade.24 Over the longer term,
they all propose to reduce this ratio further. In the outyears, the reports agree that the costs of
23 These relationships assume that the economy is functioning at full employment, during which time the economy
experiences an increase in aggregate demand due to an increase in government expenditures. This increase in demand
results in an increase in real interest rates, which would decrease or crowd out private sector spending. However, if the
economy is in a recession, additional government spending that contributes to a budget deficit can occur with little or
no crowding out. For more information, see CRS Report RL30520, The National Debt: Who Bears Its Burden?, by
Marc Labonte.
24 At the end of FY2011, the debt-to-GDP ratio is expected to be 68.9%. By the end of FY2021, the debt-to-GDP ratio
is expected to rise to 75.6% under current law. If all of the policies in the President’s FY2012 budget proposal were
enacted, the debt-to-GDP ratio is projected by CBO to rise to 87.4% by FY2021. U.S. Congressional Budget Office, An
Analysis of the President’s Budgetary Proposals for Fiscal Year 2012, Table 1-1. The Peterson-Pew Commission,
whose report is further analyzed later, explains that the 60% debt-to-GDP ratio was chosen because, in their view, it is
important for debt levels to be stabilized at this level to reassure credit markets. Another reason for choosing this level,
as noted by the Commission, was that it has become a recognized international standard.
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federal healthcare programs and reform of the tax code are some of the major issue areas that
needs to be addressed. They also recommend cuts to discretionary programs. Some of the reports
focus on specific policy options that are available, while others focus on issues of accountability
and transparency in the budget process, featuring recommendations for new budget procedures.
Some plans also recommend implementing additional, immediate, short-term stimulus that would
increase the deficit before beginning deficit reduction once the economy fully recovers. Taking
short-term policy actions, such as enacting additional fiscal stimulus, that would increase the
federal debt would reduce income in the longer term unless offsets to reduce future debt levels are
also enacted.25 Ultimately, no matter which policy is put in place, debt stabilization is key to
restoring fiscal sustainability over the long term.
This section analyzes five widely discussed proposals from non-partisan groups: 1) President
Obama’s National Commission on Fiscal Responsibility and Reform, 2) Galston-MacGuineas
Plan, 3) Peterson-Pew Commission on Budget Reform, 4) National Research Council and
National Academy of Public Administration, and 5) Debt Reduction Task Force.26 Each
discussion contains a brief description of the composition of each of these groups, followed by a
discussion of the main goals of each proposal and recommendations to achieve the targets. The
number of groups working on this issue far outnumbers those that are discussed below. At the end
of this section, a list of plans not discussed in detail in this report is also provided.
National Commission on Fiscal Responsibility and Reform
As a policy initiative included in his FY2011 budget proposal, President Obama committed to
create a bipartisan fiscal commission to be tasked with putting the nation on a sustainable fiscal
path. The commission had two main goals: balance the budget excluding net interest payments by
FY2015 (also known as primary balance) and examine ways to achieve fiscal sustainability over
the long run.27
By executive order, President Obama created the 18-member National Commission on Fiscal
Responsibility and Reform (Fiscal Commission) on February 18, 2010.28 The commission’s co-
chairs, Erskine Bowles, former chief of staff to President Clinton, and former Senator Alan
Simpson, released a draft proposal on November 10, 2010, accompanied by a second document,
25 U.S. Congressional Budget Office, Testimony of Douglas W. Elmendorf, Director, The Economic Outlook and Fiscal
Policy Choices, before the Committee on the Budget United States Senate, September 28, 2010, pp. 3-5.
26 Membership in some of these groups overlaps.
27 U.S. Office of Management and Budget, The Budget of the U.S. Government, The Budget for Fiscal Year 2011, p.
39, available at: http://www.whitehouse.gov/omb/budget/Overview/.
28 President of the United States, Executive Order 13531—National Commission on Fiscal Responsibility and Reform,
February 18, 2010, available at: http://www.whitehouse.gov/the-press-office/executive-order-national-commission-
fiscal-responsibility-and-reform. See also http://www.fiscalcommission.gov/. Prior to the creation of the Fiscal
Commission by executive order, there were several proposals in the 111th Congress to establish a special commission
whose recommendations could have the effect of addressing some, or all, aspects of the federal government's long-term
fiscal situation. These proposals would require the commission or task force to submit proposed legislative language
for congressional consideration. Each also would create special procedures to encourage expedited consideration of a
commission's proposed legislative language, effectively forcing Congress to take action on the recommendations of the
commission. However, because no agreement could be reached on the creation of a Congressional commission for this
purpose, President Obama created the Fiscal Commission by executive order. For more information, see CRS Report
R40986, Proposals for a Commission to Address the Federal Government’s Long-Term Fiscal Situation, coordinated
by Clinton T. Brass, Matthew Eric Glassman, and Jacob R. Straus.
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titled $200 Billion in Illustrative Savings, providing more detail on proposed discretionary
spending cuts.29 These proposals were amended and the final report was released on December 1,
2010.30 On December 3, 2010, the commission voted 11-7 in favor of the recommendations in the
final report, fewer than the 14 votes needed for formal approval of the commission’s proposal.
The Fiscal Commission’s final report, The Moment of Truth: Report of the National Commission
on Fiscal Responsibility and Reform, contained recommendations that would 1) reduce the deficit
by a combined $4 trillion between FY2012 and FY2020; 2) lower the budget deficit to 2.3% of
GDP by FY2015; 3) reduce tax rates and tax expenditures to collect more revenue on net; 4) cap
revenue at 21% of GDP; 5) ensure the solvency of Social Security; and 6) reduce the federal debt
to 60% of GDP by FY2023 and 40% by FY2035. In order to achieve these savings, the proposal
included cuts to both security and non-security discretionary programs, health care cost
containment, additional mandatory savings through cuts to agriculture subsidies and the civil
service retirement system, Social Security reforms, comprehensive tax reform, and budget
process changes. Excluding interest savings, spending cuts account for 69% of deficit reduction,
while revenue increases account for the remaining 31% over the FY2012-FY2020 period. Table 1
illustrates the savings achieved under their plan in FY2015 and FY2020.
Table 1. Summary of Fiscal Commission Plan
Deficit Reduction (in billions)
FY2015
FY2020
Savings In:
Discretionary
$172
$291
Social Security
$19
$54
Health Care
$35
$62
Other Mandatory
$19
$42
Revenue Increases:
Tax Code
$80
$180
Other Revenue
$18
$43
Net Interest Savings
$33
$199
Total Deficit Reduction
$376
$871
Projected Deficit Under Plan (%
2.3% 1.2%
of GDP)
29 The co-chairs’ proposal contained recommendations, which, under their calculations, would lower the deficit in
FY2015 to 2.2% of GDP, with cuts beginning in FY2012. The proposal included $200 billion in savings in
discretionary spending in FY2015, mandatory savings derived from farm subsidies and military and federal civil
service retirement, and a tax reform proposal. To achieve additional savings over the long term, the proposal also
included a plan to ensure Social Security solvency for the next 75 years and achieve healthcare related savings. The co-
chairs’ proposal and related documents can be found at: http://www.fiscalcommission.gov/news/cochairs-proposal.
30 The Fiscal Commission’s final report is available at: http://www.fiscalcommission.gov/news/moment-truth-report-
national-commission-fiscal-responsibility-and-reform.
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Source: The Moment of Truth: Report of the National Commission on Fiscal Responsibility and Reform, Figures 3 and
17.
The savings shown in Table 1 are relative to the Commissions “Plausible” baseline, which
assumes the following adjustments: 1) a permanent “doc fix” for Medicare physician payments;
2) a permanent extension of the "Bush tax cuts" for single taxpayers with AGI below $200,000
and married taxpayers with AGI below $250,000; 3) an extension of the estate tax at 2009 levels;
4) indexing the AMT for inflation; 5) a level of discretionary spending in the FY2011 President’s
Budget; and 6) a gradual reduction of spending related to the conflicts in Iraq and Afghanistan.
The “Plausible” baseline is similar to an extension of current policy, rather than current law as is
depicted in the CBO baseline. If these spending and revenue levels were measured relative to
current law rather than current policy, the Fiscal Commission’s plan would actually increase the
deficit through FY2014 and the debt-to GDP ratio through FY2018.31 Beyond FY2014 and
FY2018, the Fiscal Commission’s plan reduces the deficit and debt-to-GDP ratio, respectively,
relative to current law.
Discretionary Savings
The Fiscal Commission’s report included cutting discretionary spending back to 2008 levels in
nominal terms by 2013, with interim goals over the next two fiscal years to achieve that
reduction. Beyond that, the report limited increases to discretionary spending at half of the rate of
inflation through 2020. These spending limits would be enforced through the use of discretionary
caps, which would require equal cuts, in percentage terms, in both security and non-security
discretionary spending. The commission’s report also recommended that the President propose
annual limits on overseas contingency operations (OCO), which would not count against the
general discretionary cap but would have their own limits.32
The report also recommended establishing a disaster fund, which would provide budget authority
to be used for disasters, with strict parameters for its use. Any unused disaster funds from a fiscal
year would be rolled forward to the next fiscal year. Along with this disaster fund, the
commission’s report included creating a strict definition of an “emergency” so that the
designation is used for true emergencies, rather than as a way to circumvent fiscal caps. Finally,
though the Fiscal Commission’s report provided its own specific recommendations for cutting
spending, it also recommended that executive agencies and Congress find additional ways to
achieve savings and identify high-value investments.
Mandatory Savings
In addition to the reforms to discretionary spending discussed above, the commission’s report
included a number of immediate reforms to existing mandatory programs as well as proposals to
slow the growth of healthcare costs. Over the longer term, the report recommended setting a
target for the total federal budgetary commitment to healthcare. Changes to health-related
31 Since the Fiscal Commission's plan was released, an updated CBO baseline was released in January 2011. The
Commission's plan cannot be directly compared to the new CBO baseline, which reflects legislative changes and
updated economic and technical projections since the August 2010 CBO baseline referred to in the Fiscal
Commission’s report.
32 The Fiscal Commission’s proposal for OCO spending was based on CBO’s projections of troop reductions to 60,000
by 2015.
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spending included freezing Medicare physician payments through 2013 and a 1% cut in 2014,
followed by a newly developed payment formula for 2015 and beyond, and reforming the long-
term care insurance program (CLASS Act). Beyond these reforms, the report also included
numerous additional savings proposals from the Medicare and Medicaid programs, medical
malpractice reform, and transforming the Federal Employees Health Benefits program into a
defined contribution premium support plan.
Cuts to other mandatory spending programs were also recommended. The largest savings were
derived from reforming federal retirement programs, reducing agriculture subsidies, eliminating
some student loan subsidies, and allowing the Pension Benefit Guarantee Corporation the
authority to increase premiums. Additional programmatic savings were also provided.
Social Security
One of the major themes of the Fiscal Commission’s proposal was to ensure the solvency of
Social Security over the next 75 years. In order to accomplish this, the report contained several
recommendations to change benefits, increase taxes, increase the retirement age, and expand the
size of the contributing population. Proposals to change the benefit structure included modifying
the current benefit-formula calculation, creating an enhanced minimum benefit for low-wage
workers, increasing benefits for the very old and long-time disabled, and allowing for flexibility
in claiming benefits for those who cannot work to the normal retirement age. In order to pay for
some of these increases in benefits, the Fiscal Commission’s report recommended increasing the
taxable maximum on wages and using a more appropriate measure to calculate the cost-of-living
adjustment for beneficiaries. The report also recommended increasing the early and normal
retirement ages to be more in line with life expectancy. Finally, newly hired state and local
workers, currently not eligible for Social Security, would be included in the program.
Tax Reform
On the revenue side of the budget, the Fiscal Commission’s report proposed comprehensive tax
reform that would reduce individual and corporate tax rates, broaden the tax base, cut tax
expenditures, and maintain or increase the progressivity of the tax code. Eliminating all tax
expenditures, which would amount to roughly an additional $1 trillion in revenue a year, would
allow for deficit reduction and for a reduction of tax rates in all tax brackets. The Fiscal
Commission favored the plan that would eliminate all tax expenditures. However, their plan
allowed for the option of choosing to keep certain tax expenditures. This option would still result
in lower tax rates, relative to the present rates, though they would be higher than if all tax
expenditures were eliminated.
Corporate tax rates would also be reduced and business tax expenditures would be eliminated.
Further, the report recommended enacting a competitive territorial corporate tax system where tax
is imposed only in the country where business activity occurs and not in the country of
ownership. Ultimately, these reforms would stabilize tax collections at 21% of GDP, somewhat
higher than the historical average.
Other Reforms
Certain reforms to the budget process and other budget concepts were also recommended.
Specifically related to the budget process, the report included establishing a debt stabilization
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process that would trigger enforcement provisions if the budget was not on track to be in primary
balance by 2015 (the Fiscal Commission’s target goal) or if the debt-to-GDP ratio was projected
to increase in 2015 or thereafter. Further, the report also recommended that the Budget
Committees review and reform existing budget concepts, including budget scorekeeping. Finally,
the commission’s report recommended the implementation of automatic triggers for long-term
unemployment benefits under certain economic conditions, rather than ad-hoc legislative
extensions.
Galston-MacGuineas Plan
The CRFB published a comprehensive report titled The Future is Now: A Balanced Approach to
Stabilize the Public Debt and Promote Economic Growth, a report co-authored by Bill Galston
and Maya MacGuineas in September 2010.33 Their recommendations for debt stabilization are
based on five principles for reform: 1) no major sections of the federal budget should be declared
off-limits; 2) certain areas of the budget that encourage growth, like public investment and
education, should be targets for spending increases; 3) a strong safety net should remain to protect
vulnerable populations; 4) spending transparency should be improved; and 5) the long-term
challenges related to demographics and healthcare spending must be acknowledged. The authors
posited that the greatest obstacle to debt stabilization was the political environment.
Within this framework, Galston and MacGuineas recommended bringing the debt-to-GDP ratio
down to 60% by the end of the decade, with continued work to gradually lower this level over the
long term. To do this, they recommended an even split between programmatic reductions and tax
increases, with additional savings resulting from lower interest payments. Table 2 illustrates how
these savings would be achieved in FY2020.
Table 2. Summary of Galston-MacGuineas Plan
Savings in FY2020 (in billions)
Policy Area
Savings
Defense $80
Domestic Discretionary
$60
Social Security
$75
Health $110
Other Spending
$75
Tax Expenditures
$300
Revenues $100
Interest $300
Total $1,100
33 Bill Galston and Maya MacGuineas, The Future is Now: A Balanced Approach to Stabilize the Public Debt and
Promote Economic Growth, available at: http://crfb.org/document/future-now-plan-stabilize-public-debt-and-promote-
economic-growth. Dr. Galston is a senior fellow, Governance Studies, The Brookings Institution, and Ms. MacGuineas
is president, The Committee for a Responsible Federal Budget.
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Policy Area
Savings
% of Non-Interest Savings from
50%
Spending
% of Non-Interest Savings from
50%
Tax Expenditures and Revenue
Source: The Future is Now: A Balanced Plan to Stabilize Public Debt and Promote Economic Growth, Figure 2.
Notes: Savings are relative to the levels of President Obama’s FY2011 Budget (Proposed Policy). Calculations
for % of savings from spending, tax expenditures, and revenue exclude interest savings in the denominator.
The savings above were achieved through a variety of discretionary and mandatory spending cuts.
Specific discretionary cuts affected defense programs, including reducing or eliminating outdated
weapons systems, reforming military compensation and healthcare, contracting process reform,
small reductions in research and development funding, and removing some layers of bureaucracy.
The report also called for a three-year freeze on all domestic discretionary spending, with growth
in spending thereafter capped at inflation through FY2020.
Mandatory savings would come from Social Security and health-related cuts. Savings from Social
Security included accelerating the currently scheduled increase in the retirement age to 67, with
increases in the retirement age thereafter tied to increases in life expectancy. The plan also
included an expanded disability program for workers who cannot work to the required eligibility
ages; slowing the growth of benefits for medium and high income earners; changing the measure
of inflation used to calculate the cost of living increase; including new state and local workers in
the system; and establishing mandatory add-on retirement accounts. In terms of health spending,
the report recommended reforming the nation’s malpractice laws by limiting pain and suffering
awards and creating specialized health courts; increased cost sharing of Medicare Part B
premiums for higher income seniors; gradually raising the Medicare eligibility age from 65 to 67;
expanding the powers of the new Independent Payment Advisory Board; and scaling back the
healthcare exchange subsidies.
The report also included recommendations for tax changes and the addition of a carbon tax. The
revenues from the carbon tax would replace a portion of the Social Security payroll tax and would
also be devoted to deficit reduction. In terms of tax expenditures, the report recommended
creating a tax expenditure budget, cutting this type of “spending” by 10%, and capping its growth
thereafter. New tax expenditures would be subject to a strict “PAYGO for tax expenditures.”
Overall, the report suggested that the tax base needed to be broadened, in combination with lower
rates, to achieve additional revenue collection that could be used to reduce the deficit.
Beyond publishing the Galston-MacGuineas report, the CRFB has led or assisted in other fiscal
stability initiatives. Through their “Let’s Get Specific” reports on Social Security, Healthcare, and
Tax Expenditures, CFRB has provided a list of specific policies that could be used to for the
purposes of deficit reduction in each of these areas.34 In addition, the CRFB also created a
simulator called “Stabilize the Debt!”, which allows the public to test their own policy choices
that would lower the debt-to-GDP ratio to 60% by FY2018.35 These tools are being used to
34 CRFB “Let’s Get Specific” reports are available at
http://crfb.org/publications/search?keywords=&document=164&issue=All&project=All.
35 The debt simulator is available at: http://crfb.org/stabilizethedebt/. The results of the policies chosen by the people
who had previously submitted their choices to the simulator were aggregated in the Appendix of the Peterson-Pew
Commission on Budget Reform, Getting Back in the Black (see below).
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inform the public of the magnitude of the fiscal problem that the country faces as well as the
types of sacrifices that may be required to achieve fiscal stability.
Peterson-Pew Commission on Budget Reform
The Peterson-Pew Commission on Budget Reform released a comprehensive proposal to achieve
fiscal sustainability in November 2010 titled Getting Back in the Black.36 The key component of
this proposal was to improve the nation’s fiscal position by stabilizing the debt-to-GDP ratio at
60% by FY2018, and gradually reducing the debt as a share of GDP over the long term.37 Policy
changes would be phased in beginning in FY2012. The Peterson-Pew Commission reforms
focused on changing the budget process and strengthening rules and enforcement mechanisms
within Congress to ensure that the benchmarks were met.
First, the commission called on Congress to pass a “Sustainable Debt Act” (SDA), which would
set a medium-term debt-to-GDP target along with annual fiscal debt targets in order to facilitate
the path to reaching it. The annual targets would have some flexibility to respond to economic
conditions and could be waived or adjusted under certain circumstances. However, it was also
assumed that if the economy was performing well, the debt would be reduced at a faster rate.
Once the medium-term targets were met, the commission recommended setting a new longer-
term target that would allow for the continuation of the budgetary framework with programmatic
caps and triggers focused on the programs that are driving increases in the federal debt at that
time. Over the long term, the commission recommended that the debt-to-GDP ratio be
continuously reduced below the 60% level.
To achieve the benchmarks set in the SDA, the commission recommended several changes to the
budget process and enforcement mechanisms. In order to adhere to the medium-term target set in
the SDA, both the President’s budget and the congressional budget resolution would be required
to contain policies to achieve the goal. Congress would adopt a multi-year budget resolution that
would remain in effect unless changes were required in order to meet SDA targets. Several
enforcement mechanisms would also be put in place to help ensure that an annual budget
remained on track to hit the SDA debt targets. These mechanisms included an automatic “debt”
trigger that would put the budget back on track if enacted legislation fails to meet the Act’s
targets,38 a strengthened PAYGO process with fewer programmatic exemptions, and the
reestablishment of budget caps to cover discretionary spending as well as tax expenditure
“spending.” Finally, the commission recommended an end to the use of the “emergency”
designation to bypass enforcement rules in favor of the creation of an emergency reserve, which
could be drawn upon in appropriate situations.
36 This report is available at: http://budgetreform.org/document/getting-back-black. It was preceded by a report titled
Red Ink Rising: A Call to Action to Stem the Mounting Federal Debt, available at:
http://budgetreform.org/document/red-ink-rising. The commission co-chairs were former Representatives Bill Frenzel,
Tim Penny, and Charles Stenholm. Commissioners included former Members of Congress, former congressional staff,
former directors of OMB and CBO, and former comptrollers general of GAO.
37 Though the 60% debt-to-GDP target was chosen, the Commission says that their framework would work with any
debt-to-GDP ratio target.
38 If the automatic debt trigger was invoked, adjustments would be capped annually at 1% of GDP and would be evenly
divided between tax increases and spending cuts, with as few programmatic exemptions as possible.
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In order to meet goals over the medium and long term, the Peterson-Pew Commission
recommended several additional changes to increase transparency and accountability in the
budget process. These changes include integrating long-term data into the President’s budget and
congressional budget documents; imposing annual reporting requirements on progress towards
achieving sustainability; incorporating the presentation of tax expenditures into the budget
process; and improving budgetary accounting for various other long-term expenditures. To
increase accountability, the commission recommended changes to the way that the budget
baseline is used in order to more appropriately illustrate the increases in spending levels from one
year to the next, and requiring an annual Presidential address to Congress on the status of meeting
fiscal targets.
NRC/NAPA Committee on the Fiscal Future of the United States
Choosing the Nation’s Fiscal Future, issued in January 2010 by the National Research Council
(NRC) and the National Academy of Public Administration (NAPA), details four paths that would
bring the federal budget back to a sustainable path.39 The committee recommended that action on
deficit reduction begin around FY2012. Assessing the fiscal sustainability of future federal
budgets would be measured by the government’s public debt as a percentage of GDP, with the
goal of maintaining a 60% ratio within a decade.40 In order to determine whether or not a
proposed budget is successful at putting the country on the path to fiscal sustainability, the
committee recommended that the budget be evaluated using the following criteria: Does the
budget reduce the deficit in the near future?; Does the budget reduce the federal debt to achieve a
sustainable debt-to-GDP ratio?; Does the budget align spending and revenue closely over the long
term? When evaluating a proposed federal budget in this context, the committee suggests it is
important to also consider whether spending on entitlement programs is being restrained, if
resources are being use efficiently and effectively, and if the burdens placed on state and local
governments are fully assessed.
The four paths detailed in the report were expected to put the federal budget on a sustainable
course. In choosing one of the four paths, the committee acknowledges that it would be necessary
to evaluate how the proposed spending and revenue levels fit into the context of what type of
government would be most consistent with the values and beliefs of the country. Table 3 details
these four paths to achieving the 60% ratio of debt-to-GDP over the long term, with action to be
taken within the next few years to lower the current budget deficit. Achieving fiscal sustainability
under any of these options would depend on what combination of changes in spending and
revenue policy were chosen.
39 This report is available at: http://www.ourfiscalfuture.org/. The NRC and NAPA convened a Committee on the
Fiscal Future of the United States, co-chaired by John Palmer and Rudolph Penner. Committee members included
experts from academia, thinks tanks, and private enterprise.
40 The report did not suggest that the 60% debt-to-GDP ratio is a “magic” number, but rather is a target consistent with
appropriate levels of spending and taxation that can be reached through a variety of reasonable policy choices.
Ultimately, the target level will have to be determined by elected leadership. NRC and NAPA, Choosing the Nation’s
Fiscal Future, pp. 56-57.
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Table 3. NRC/NAPA Proposals for Four Paths to Achieving Fiscal Sustainability
Plan RevenueTarget
Spending
Target
Details
Low
18-19% of GDP
21-22% of GDP
Reductions in federal spending for al federal
responsibilities; sharp decreases in the growth rates of
health and retirement programs
High
33% of GDP
33% of GDP
Substantial increase in revenue; spending that
continues under current policy; eventual reductions in
healthcare spending growth
Intermediate 1 25% of GDP
25% of GDP
Lower growth rates for Social Security, Medicare, and
Medicaid; new public investments
Intermediate 2 25% of GDP or
25% of GDP or
Lower growth rates in Social Security, Medicare, and
slightly higher
slightly higher
Medicaid but less constrained than Intermediate 1;
promises to the elderly are a greater priority than
other spending
Source: Choosing the Nation’s Fiscal Future, pp. 5-6.
These four scenarios achieve the same ultimate goal of long-term sustainability, though they
employ different methods of reaching it. The “Low” scenario maintains revenues at historical
levels, while restricting federal spending to be more in line with this level of revenues. The
“High” scenario combines a substantial increase in revenues with high levels of government
spending. The two “Intermediate” scenarios entail levels of spending and revenues fall in between
the “Low” and “High” scenarios. The “Intermediate 1” scenario focuses on a greater level of
investment spending, which would bring relatively larger benefits to future generations. The
“Intermediate 2” scenario necessitates more spending devoted to Medicare, Medicaid and Social
Security. Under each of these scenarios, spending levels represent a major reduction in health
programs relative to current policy.41
Each of these scenarios depends on lower growth rates in the three major entitlement programs.
Since restoring Social Security to long-term solvency is not as large a problem relative to the
health programs, options are available without a change to the nature of the program. Regarding
Medicare and Medicaid, the report recommended direct spending reductions in the near-term,
followed by more fundamental reform of the programs over the longer term. Proposals for
reducing spending in the short term included increasing the Medicare payroll tax or Medicare
beneficiary cost sharing, or cutting provider reimbursement rates or the federal cost-sharing for
Medicaid.42 Options for altering the healthcare system in the long term, with a focus on
improving care quality and health outcomes, included instituting a single-payer health insurance
system; a “robust public option” (a government insurance company which would compel
healthcare providers to work at rates dictated by the government); a “non-robust public option” (a
government insurance company which would not have power to set rates); impose price controls;
provide individuals with funds to purchase their own insurance plans; and eliminating group
health insurance.43
Outside of spending on Social Security, Medicare, and Medicaid, the committee focused on
several reforms that could be undertaken on the discretionary side of the budget as well as in
41 Ibid., p. 72.
42 Ibid., p. 77.
43 Ibid., pp. 86-91.
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other mandatory programs. These options included various levels of spending, from cuts of 20%
to increases of 16%.44 Increases in spending could be achieved, while still reaching fiscal
sustainability the report stated, if corresponding cuts in other areas in the budget, revenue
increases, or both matched the chosen level of spending in a category.
In addition to these policy changes, the committee also recommended changes in the budget
process, which would allow for forward-looking assessments rather than the current process,
which focuses heavily on the present. These changes included setting both medium- and long-
term fiscal goals and instituting mechanisms that would hold both Congress and the President
accountable in meeting goals. Specific reforms included further integrating long-term budget
projection data into the formulation of the federal budget; including information on the net
present value of future costs for specific programs in the budget;45 and increasing the use of
accrual accounting which would record the net present value of long-term contractual
commitments.46
The Debt Reduction Task Force
The Debt Reduction Task Force (DRTF) was created by The Bipartisan Policy Center and co-
chaired by former Senator Pete Domenici and former OMB and CBO director Alice Rivlin. The
report produced as a result of their efforts, titled Restoring America’s Future, contained a
comprehensive path to restore the economy and achieve fiscal sustainability.47 Recommendations
included spending reductions and tax increases to achieve a debt-to-GDP ratio of less than 60% of
GDP by FY2020, a balanced primary budget by FY2014, and a strengthened economy.
These results were achieved by incorporating changes to Social Security, controlling healthcare
costs, and freezing discretionary spending. Other cuts to mandatory programs were also included.
On the revenue side, the plan recommended a simplification of the tax code, lower corporate and
individual tax rates, and a debt reduction sales tax. Along with these recommendations, the plan
included a one-year payroll tax holiday in calendar year 2011 to help boost the economy and
create jobs. This provision would increase the deficit in the short term.48 The DRTF estimated that
the tax holiday would create 2.5 to 7 million new jobs over the next two years.49
44 These changes in spending are relative to the report’s calculated baseline, which is based on the baseline projections
of the Congressional Budget Office, with modifications “…to take into account of likely Congressional actions.” Ibid.,
pp. 135-140.
45 The costs referred to here are also known as “fiscal exposures,” a term coined by the Government Accountability
Office (GAO), for the long-term costs for budgetary items such as current federal employee pension and health
benefits, federal insurance, and operations and maintenance on newly acquired capital assets, along with the costs of
Social Security, Medicare, and Medicaid, which are not expressly included in the current year federal budget.
46 In other government documents such as the Financial Report of the United States Government, some of these long-
term obligations are recognized as liabilities on the balance sheet of the United States.
47 The task force’s report can be found at: http://www.bipartisanpolicy.org/projects/debt-initiative/about. The task force
comprised 19 members: former public officials representing all levels of government, academics, think tank experts,
and representatives of private enterprise.
48 A one year payroll tax holiday in 2011 was subsequently enacted after the release of the DRFT report in the Tax
Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111-312), which reduces payroll
taxes for employees by 2 percentage points. The DRTF called for full relief from the payroll tax for employers and
employees for 2011.
49 DRTF, Restoring America’s Future, p. 11.
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Table 4 illustrates the how the recommendations in the report achieved debt reduction goals.
Roughly half of the debt reduction was achieved through spending cuts, while the other half was
achieved through revenue changes.
Table 4. Distribution of DRTF’s Changes to Spending and Revenue
(selected fiscal years)
Other
Tax
Revenue
Debt-to-
Fiscal Year
Spending Cuts
Expenditures
Increases
GDP Target
2020 54% 38% 9%
60%
2030 50% 37% 13%
52%
2040 52% 35% 13%
52%
Source: Restoring America’s Future, pp. 15, 127.
Notes: Interest savings are not included.
Along with the changes in the tax code discussed above, the report also recommended raising
revenue by capping the tax exclusion of employer provided health benefits. Beginning in 2018,
the cap would begin to be phased out entirely over the next 10 years. Specifically relating to
Medicare, premiums would be increased gradually with a transition to a “premium support”
program beginning in 2018. Under this new structure, the traditional Medicare program would
remain in place with increases in premiums linked to increased costs above certain levels. A new
program will also be established to allow beneficiaries to purchase coverage on the new health
insurance exchanges. Cost-control changes to the Medicaid program would also be instituted,
including changes to the federal-state cost sharing arrangement. Other healthcare cost control
measures were also included.
Social Security reforms included combining increased revenue collection with adjustments to
benefits. By raising the amount of wages subject to payroll taxes and incorporating newly hired
state and local workers into the program, revenues would increase, especially in the near term. On
the other side, using a modified cost-of-living adjustment, slightly reducing benefits for higher
income beneficiaries, and indexing the benefit formula for increases in life expectancy, overall
benefit payments would decline. Minimum benefit levels would also be increased for lower
income wage earners. Combined, these changes would make the program solvent for the next 75
years.
Other spending cuts include freezing discretionary spending and, thereafter, capping growth to
GDP growth rates. This freeze would be enforced by statutory spending caps and automatic cuts
in all programs. Domestic discretionary spending would be subject to this freeze for four years,
while defense discretionary spending would be subject to the freeze for five years. Cuts would
also be made to certain farm payments and the federal civilian retirement program. Other
spending reduction proposals were also included.
Additional revenue would be raised by making various changes to the tax code, with the goals of
making it easier to file taxes and removing economic and consumption distortions. Ultimately, the
task force said that the changes would create a more progressive tax system. Current individual
tax rates would be replaced by a two-tiered tax rate system with rates of 15% and 27%. Corporate
rates would decline from 35% to 27%. Most tax expenditures would also be eliminated.
Specifically, the mortgage interest and charitable contribution deductions would be replaced by a
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flat 15% refundable credit for anyone who qualifies and the deduction for state and local taxes
would be eliminated. Finally, additional revenue would be raised through a national Debt
Reduction Sales Tax (DRST), beginning at 3% in 2012 and increasing to 6.5% in 2013. Primarily
for low income earners, the deductions that are eliminated and the DRST would be offset by a
higher earned income and child tax credit.
The task force also included proposals to create additional budget enforcement mechanisms and
reforms. These included the imposition of statutory spending caps, as mentioned earlier, the
strengthening of statutory PAYGO, conversion to biennial budgeting, and enactment of specific
long-term budgets for certain programs to be monitored by a new Fiscal Accountability
Commission to make sure that that the programs are staying on target.
Other Groups
The proposals described above do not represent a comprehensive list of all the groups or
individuals that provided recommendations to stabilize or reduce the federal debt. There are
additional reports on how fiscal sustainability can be achieved that were issued by Members of
Congress and outside groups.50 These additional reports include:
• Representative Mike Quigley, Reinventing the Federal Government: The Federal
Budget – Part I, available at:
http://quigley.house.gov/images/stories/pdf/quigley_reinventing_government_the
%20federal%20_budget_part_1.pdf
• Representative Paul Ryan, A Roadmap for America’s Future, available at:
http://www.roadmap.republicans.budget.house.gov/
• Representative Jan Schakowsky, Schakowsky Deficit Reduction Plan, available
at:
http://schakowsky.house.gov/images/stories/1202_Schakowsky_Deficit_Reducti
on_Plan.pdf
• Brookings-Heritage Fiscal Seminar, Taking Back Our Fiscal Future, available at:
http://www.brookings.edu/~/media/files/rc/papers/2008/04_fiscal_future/04_fisca
l_future.pdf.
• Campaign for America’s Future, Report and Recommendations of the Citizens’
Commission on Jobs, Deficits and America’s Economic Future, available at:
http://www.ourfuture.org/report/citizenscommission
• Center for American Progress, A Thousand Cuts: What Reducing the Federal
Budget Deficit Through Large Spending Cuts Could Really Look Like, available
at: http://www.americanprogress.org/issues/2010/09/thousand_cuts.html
• CATO, A Plan to Cut Spending and Balance the Federal Budget, available at:
http://www.downsizinggovernment.org/balanced-budget-plan
50 Some individuals/groups have issued reports targeting reforms to one specific area of the budget. See, for example, a
proposal by Alice Rivlin and Paul Ryan titled A Long Term Plan for Medicare and Medicaid, available at:
http://paulryan.house.gov/UploadedFiles/rivlinryan.pdf.
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Reducing the Budget Deficit: The President’s Fiscal Commission and Other Initiatives
• Demos, The Century Foundation, and the Economic Policy Institute, Investing in
America’s Economy: A Budget Blueprint for Economic Recovery and Fiscal
Responsibility, available at: http://www.ourfiscalsecurity.org/fiscal-blueprint
• The Heritage Foundation, How to Cut $343 Billion from the Federal Budget,
available at: http://heritage.org/Research/Reports/2010/10/How-to-Cut-343-
Billion-from-the-Federal-Budget
In March 2011, CBO issued Reducing the Deficit: Spending and Revenue Options, its latest
update in a series providing a list of options for altering spending and revenue policies for the
purpose of deficit reduction. The report does not make recommendations to Congress on which
options it should chose.51
Author Contact Information
Mindy R. Levit
Analyst in Public Finance
mlevit@crs.loc.gov, 7-7792
51 U.S. Congressional Budget Office, Reducing the Deficit: Spending and Revenue Options, March 2011, available at:
http://www.cbo.gov/ftpdocs/120xx/doc12085/03-10-ReducingTheDeficit.pdf. Similar publication published previously
can be found at: http://www.cbo.gov/publications/bysubject.cfm?cat=2.
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