As Debt-Limit Deadline Nears, Lawmakers Must Avoid Budget Gimmicks

At a press briefing yesterday, President Obama invited Congressional leaders of both parties to the White House tomorrow to continue ongoing debt ceiling negotiations. As the August 2nd deadline for raising the limit draws nearer, the President also stressed the need for lawmakers to be open to compromise, saying he hoped "that everybody is going to leave their ultimatums at the door."

As pressure intensifies and opposing parties continue to cast blame, using budget gimmickry as a quick fix to the problem probably seems like an increasingly appealing solution. However, as we stated in our recent paper What Needs to Come Out of the Debt Ceiling Negotiations, using budget gimmicks to avoid making the necessary tough choices is a huge DON'T.

While failing to raise the debt ceiling in time would be a serious mistake, so too would be failing to enact a credible plan to reduce and stabilize the debt. If the plan resulting from ongoing negotiations is seen as weak or ineffective in addressing long-term drivers of the debt, it could be perceived as a sign that Washington is unable to correct its fiscal imbalances, which could also damage the economy. Using budget gimmicks would undermine the credibility and effectiveness of any fiscal plan, and should be avoided.

Here are some potential budget gimmicks to look out for:

  • Manipulating the baseline: There are many reasonable baselines for policymakers to choose from. However, different baselines can make the total amount of savings bigger or smaller than the $4 trillion target we have called for -- so each baseline requires a different deficit target. Policymakers should focus on what levels they can get deficits and debt down to.
  • Counting war savings: Under current law, spending in Iraq and Afghanistan is technically projected to grow with inflation, despite plans for withdrawal being in place. While it may be sensible to apply budget controls to war spending, such savings (which could total more than $1 trillion) should not be counted towards the $4 trillion in total deficit reduction since policies to achieve them are already in place.
  • Expanding the timing window: Stabilizing and reducing the national debt will require at least $4 trillion in savings over ten years compared to our plausible baseline. Extending that time frame to more than ten years would result in insufficient deficit reduction and should be avoided.
  • Excessively back-loading savings: A sensible plan to stabilize the debt will implement policies gradually both to avoid disrupting a very fragile economic recovery and to give people time to adjust. However, excessive and arbitrary back-loading might be a sign that politicians are not serious about deficit reduction and are instead counting on future Congresses to override what they have put in place.
  • Assuming expiring provisions are paid for (or expired): When identifying a plan's effect on the debt and deficit, lawmakers must make realistic assumptions about the future. In assuming current law (under which the Bush tax cuts, the AMT, and the SGR either expire or revert to levels never allowed by Congress), lawmakers could greatly exaggerate the effectiveness of their plan.

The debt ceiling offers lawmakers an opportunity to begin dealing with deficits and debt. Let's hope they avoid resorting to budget gimmicks.