CRFB Testifies Before the President’s Fiscal Commission

The National Commission on Fiscal Responsibility and Reform held its fourth meeting yesterday where it heard from our very own CRFB President, Maya MacGuineas, and board member, Barry Anderson.

MacGuineas began her testimony with a warning, citing the recently released CBO report that outlines what a debt-driven fiscal crisis might look like. (Also see our Fiscal Road Map paper, A Preventable Crisis.) One of the most unnerving consequences of high debt levels and projections of a deteriorating fiscal position—such as we have in the U.S.—is that what appears to be a secure financial environment with low interest rates can change extremely abruptly if markets lose faith.

The main points of MacGuineas’ testimony were: 1) the country needs both a medium- and long-term fiscal target; 2) we must balance measures to help the economy and reduce the debt, but that plans to reduce the debt will in and of themselves help the economy; and 3) our policies should be crafted to grow the economy. All of these points are consistent with the conclusions of three of the outside groups working to develop policy and process ideas to help the commission: The Peterson-Pew Commission on Budget Reform, the Bipartisan Policy Center's Dominici-Rivlin Debt Reduction Task Force (still in progress), and National Research Council and National Academy of Public Administration’s “Choosing the Nation’s Fiscal Future."

On its most basic level, MacGuineas argued, a clear fiscal goal gives policymakers a way of saying no to unaffordable spending or tax cuts without fear of punishment by the voters. In fact, strict adherence to a fiscal goal might increase an official’s popularity, a reversal of the current trend in which the official who brings home the most money gets the most support.

MacGuineas then moved on to discuss when these budgetary changes should start, stressing the need to consider the current state of the economy. If we begin cutting too soon, the budding recovery could falter. However, if we act too late, we may be forced to take more severe measures than we initially expected. MacGuineas also mentioned the possibility that the time for stimulus spending might not be over. While she did not object to further spending, she suggested it be paid for by longer-term offsets, rather than financed through borrowing.

There are significant financial gains from the enactment of a specific plan to reach fiscal goals—even before the plan is in place. If credit markets truly believe that the U.S. is going to take real steps to get its fiscal house in order, it will be much easier to borrow at lower interest rates. This increased availability of credit would spur private sector economic activity, giving the economy and job markets a boost at a time when they desperately need it. Check out CRFB’s coverage of the “Announcement Effect Club” for more information on this promising phenomenon.

Any plan put in place but phased in over time would have to be deemed credible—which MacGuineas suggested meant it would have to be statutory, specific, bipartisan, and transparent to the public. Policy-wise, all groups had a number of shared findings:

• Entitlement growth will have to be controlled

• You can not get to any reasonable goal without new sources of revenue

• All discretionary spending—including defense—will have to be part of a plan

• Fundamental tax reform is desirable, and even more so if and when revenues increase

Barry Anderson then testified on comparative budgeting and the need for strict budget rules. He began with a quick comparison of international budgeting procedures, concluding that although many nations emulate the process by which the United States formulates its budget, many have also recently adopted stringent fiscal rules that have put their budget processes ahead of the U.S. in terms of sustainability.

Anderson then elaborated on these rules, dividing them into two categories: deficit and spending. While he testified that he sees a place for a deficit rule, he felt deficit rules alone are weak if not enforced specifically by a spending rule. Comparing countries in the Eurozone, Anderson showed how countries like Denmark—which coupled spending rules with deficit rules—were actually able to run a deficit almost half the size of that stated in the lone deficit rule. Barry also mentioned the success Switzerland has experienced with a rule specifically capping entitlement spending in the budget and using a tool known as a “debt brake” which allows the government to spend only so much given a certain amount of revenue.

Anderson testified that spending rules are superior to deficit rules due to the cyclical nature of the economy. While deficit rules are procyclical and likely to get ignored during the good times, spending rules are counter-cyclical and work regardless of the ambient economic situation. Furthermore, he testified as to the greater transparency of a spending rule, making it a superior option for representative governments.

To check out the highlights, including Al Simpson’s jokes, see here.