How Does Simpson-Bowles Compare to What Europe Is Doing?

As Senator Mark Warner pointed out last week in the Christian Science Monitor, the United States is still in a position where long-term debt reduction is much easier than in several European countries now in fiscal crisis. The Simpson-Bowles plan, for example, combines spending cuts and revenue increases that total less than half of what the United Kingdom is undertaking, while enjoying almost twice as many years to phase in. The contrast with Greece and Spain is even starker – if Congress enacts a debt reduction plan before our debt grows even more.

Comparison of Structural Deficit Reduction Targets (Percent of GDP)
  First Year Impact Largest Change From Previous Year Longer-Term Deficit Reduction Target
Simpson-Bowles -0.2% (2012) -0.5% (Year 2) -2.7% (10 years)
Fiscal Cliff -3.8% (2013) -3.8% (Year 1) -2.7% (10 years)**
Germany -0.4% (2011) -0.4% (Year 1) -1.2% (4 years)
Greece -3.0% (2011) -5.4% (Year 3) -9.5% (5 years)
Spain -3.2% (2012) -3.2% (Year 1) -7.4% (4 years)
UK -0.6% (2011) -2.0% (Year 2) -6.1% (6 years)

Note: Numbers exclude interest
Sources: CRFB calculations, CBO, La Gazette de Berlin, Daily Telegraph, MarketWatch, European Commission, Fishburn Hedges
**Compared to CRFB Realistic Baseline

As you can see, the "fiscal shock" of the Simpson-Bowles plan is much lower in the near term than the austerity measures being employed in these European nations. It is most closely in line with the pace of deficit reduction already underway in Germany. In the year of greatest single-year impact from the previous year, Simpson-Bowles (pre-Budget Control Act) would reduce the deficit by 0.5 percent of GDP more than the annual deficit change in the current-policy baseline; whereas Greece, Spain, and the UK’s greatest single-year impact are all substantially larger. In fact, it is the fiscal cliff that looks much more like the front-loaded austerity taking place in Europe.

Even though Greece and Spain’s plans are not fully specified, they are already partly enacted and in the context of much higher unemployment rates than in the other three countries. These European nations have passed the point where inaction or gradual deficit reduction were possible, and many of these spending reductions and revenue increases are already underway. While it is possible some countries like Spain may fall short of these structural deficit targets in certain years, they will still go a lot further than Simpson-Bowles.

The larger point, though, is that we may not be in the position of a Spain or Greece, but we should use that advantage to prevent us from getting there by enacting a deficit reduction plan and phasing it in gradually.