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What's Needed to Balance the Budget and Meet Other Fiscal Goals

Feb 3, 2017 | Budgets & Projections

With debt projected to rise from 77 percent of GDP today to 89 percent by the end of the decade, our latest estimates find that fixing the debt is harder than ever. By our estimates, balancing the budget by 2027 will require about $8 trillion of deficit reduction over ten years. Simply putting the debt on a more sustainable path relative to the economy will require several trillions of dollars of cuts.

When the debt is low, one reasonable fiscal goal is to stabilize the debt as a share of GDP so it grows no faster than the economy. Stabilizing the debt at its current level of 77 percent of GDP would require $3.3 trillion of deficit reduction over ten years. Of course, keeping debt at this post-WWII-era record-high level is itself a problem because it may not leave much room to deal with future crises. Gradually reducing the debt-to-GDP ratio to 70 percent by 2027 would require more than $5 trillion of savings, and reducing it to 60 percent would require $8 trillion.

Achieving these savings will require reducing spending, increasing taxes, or, most likely, some combination of the two. Economic growth can help, but no realistic level of growth will be enough to stabilize the debt without other policy changes.

Importantly, hitting these fiscal targets will be even more difficult if policies that increase the debt are adopted. In particular, Republican leadership has discussed using a current policy baseline for tax reform, assuming the extension of certain tax breaks which are scheduled to expire. This assumption that all expiring tax breaks are instead extended would reduce revenue by $450 billion. President Trump, meanwhile, has proposed eliminating the defense sequester. This would cost another $500 billion.

With interest, these two changes alone would make achieving any debt targeted fiscal goal about $1 trillion harder. In other words, stabilizing the debt would require $4.4 trillion of savings over ten years and putting the debt on a clear downward path toward 70 percent of GDP would require $6.4 trillion. Balancing the budget would still require would require nearly $9 trillion.

Other initiatives, such as a debt-financed infrastructure plan, could make these goals even harder to reach. And as we wrote before, if policymakers now plan to save $2 billion rather than $2 trillion from a repeal and replace of Obamacare, there will have to be more cuts elsewhere compared to past Congressional budgets that targeted balance.

10-Year Savings Needed To Hit Fiscal Goals

Fiscal Goal Current Law Repealing the Defense Sequester and Extending Tax Breaks
Stabilize Debt at Current Share of GDP $3.3 trillion $4.4 trillion
Reduce Debt Modestly
(70% of GDP)
$5.3 trillion $6.4 trillion
Reduce Debt to 2010 Level
(~60% of GDP)
$8.1 trillion $9.2 trillion
Balance the Budget by 2027 $8.2 trillion $8.9 trillion
Reduce Debt to Historic Average
(~40% of GDP)
$13.7 trillion $14.8 trillion

Source: CBO Calculations Based on CBO January 2017 Baseline and FY 2017 Chairman's Mark House Budget Committee. Estimates assume that deficit reduction scales up as in Chairman Price's proposed FY 2017 budget.
*Extending tax breaks assumes that 1) 50% bonus depreciation, which is scheduled to begin phasing down after this year, is continued at current levels. 2) The continuation of approximately 50 other tax breaks which either expired at the end of 2016 or will expire in the next decade.

This is why lawmakers who want to fix the debt need to first stop digging and take a serious look at every part of the budget and tax code for possible deficit reduction. Policymakers may not be able to achieve a balanced budget, but they should set and achieve a fiscal goal that puts the debt on a clear and sustainable downward path over the long term.