No sooner had the bipartisan National Commission on Fiscal Responsibility and Reform released its recommendations for trimming the national deficit and debt than the left and the right staked out their partisan responses. “The Moment of Truth,” as the report is called, is nothing if not ambitious in its scope and a good-faith effort to wrestle this problem to the ground, and as a result there was plenty in there to be unpalatable to just about everyone. (At the end of the day, isn’t that the definition of a good compromise?) Some high/low lights include capital gains and dividends would be taxed at ordinary income rates, but ordinary income rates would be changed to just 3 brackets—12%/22%/28%. Interest income from newly issued municipal bonds would be taxable. The mortgage interest deduction would be capped at $500,000. There would be no other itemized tax deductions, just standard ones for everyone. The corporate tax rate would be lowered to 23%-29% from the current 35%. A gas tax of 15 cents per gallon would be added to fund transportation initiatives. The report also touched the third rail of Social Security (gradually raise the retirement age to 69). Other nuggets: allow the Pension Benefit Guarantee Corporation to charge a risk-based premium. Cap discretionary spending, and return total spending to pre-crisis 2008 levels by 2013. Use electronic-only form for documents to save $1.1 billion a year in printing costs. Cut the 2 million-person government workforce by 10% by hiring only 2 new workers for every three that leave to save $13.2 billion annually. Sell excess government real estate to save $100 million annually on maintenance.
All in, the plan is designed to achieve nearly $4 trillion in cumulative deficit reduction through 2020 and reduce the deficit to 2.3% of GDP by 2015. It also looks to reduce federal debt to 60% of GDP by 2023 and 40% by 2035. Of the $4 trillion in cumulative savings through 2020, 43% comes from cuts in discretionary spending, 14% from cuts in mandatory spending, 20% from closing tax loopholes and 17% from net interest savings. To us, the most salient bullet point for the creation of the plan is summarized as follows: “If our national debt grows higher, the federal government may even have difficulty borrowing funds at an affordable interest rate, preventing it from effectively responding. Large debt will put America at risk by exposing it to foreign creditors. They currently own more than half our public debt, and the interest we pay them reduces our own standard of living. The single largest foreign holder of our debt is China, a nation that may not share our country’s aspirations and strategic interests. In a worst-case scenario, investors could lose confidence that our nation is able or willing to repay its loans – possibly triggering a debt crisis that would force the government to implement the most stringent of austerity measures.”
Since “government implementation of stringent austerity measures” seems to be the policy du jour (or del dia or the Irish equivalent) in running a Western country, the timing of this release is a very interesting coincidence. Although the Commission was appointed by President Obama by executive order in February 2010, countries that are thought to be in much worse shape than the United States are already beginning the process of implementing their own budget-cutting processes. As for how we compare to some other Western countries (including the problem children of Greece, Ireland and Spain), consider the following graphs, which come from the databases of the IMF (and thus are presented for consistency of source):
As these graphs show, if these countries were in the cast of “The Biggest Loser,” the US would be among the fattest competitors. Thus, with this report, is the US now able to say, “See here, we are going to go work as hard as the rest of you to slim down”? Maybe not. Today, for all the fanfare associated with “The Moment of Truth,” it did not get the votes necessary (14 out of 18 Commissioners) to move it forward to Congress for consideration. Only 11 Commissioners voted yes, as five of the six senators on the Commission backed the plan, but only one of the six House members did.
The Moment of Truth will have to wait. As the report said, “there is no identifiable tipping point of debt relative to GDP indicating that a crisis is likely or imminent,” but “the higher the debt, the greater the risk of such a crisis.”