Tax Analysts Blog

Getting to 3 . . . Eventually

Posted on Nov 19, 2009

One reason the Democrats need to finish health care reform this year is that starting in January, the Administration will begin its big push on deficit reduction. January is the State of the Union address. February is the release of the budget. In the first Obama budget the stated goal was cutting the deficit in half in four years. That sounds good but doesn't accomplish much given the current sky-high deficit levels.

The Obama economic team knows it needs to reduce the deficit and it knows that a minimally credible budget policy must have "fiscal sustainability" as its goal. In the U.S. economy that means getting the deficit down to about 3 percent of GDP. In current terms, one percent of GDP is $142 billion.

As Treasury Secretary Geithner told CNBC on November 12: " As growth strengthens we need to bring our budget deficits down to a sustainable level. For the United States given the structure of our economy that means roughly the level of 3 percent of GDP over the medium term. That’s something we can achieve."

And the same talking points are reflected in Budget Director Peter Orszag's comments on November 17: “In the medium term out in 2015, 2016, 2017, we need to get to something around 3 percent of the economy so that debt is no longer rising as a share of the economy.”

The latest administration estimates show the budget deficit ending up at about 4 percent of GDP at the end of the next decade. It is small potatoes from an economic perspective -- but to get the deficit down from 4 to 3 percent -- would truly be a monumental political task. Given the current political climate, it is hard to see how wealthy individuals and large corporations can escape major tax increases if the goal is going to be achieved.

The Administration deserves credit for setting out fiscal sustainability as a budget goal. This is something new in budget policy. But the administration at its own discretion sets the time for achieving the goal for the end of the President's second term (if he get's one). That -- and the fact that the Congress as an institution will pursue deficit reduction with much less ardour -- means the plan lacks credibility. Careful, Mr. President, a budget policy that is not credible could disappoint financial markets and do more harm than good.

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