Looking Beyond the Ten-Year Window
Our paper released yesterday detailed how our long term debt problems are far from solved, making clear the unsustainability of federal debt over the long term and how much deficit reduction remains to fix it. As policymakers consider how to achieve long term deficit reduction, they must make sure they effectively evaluate policy options available to them, and have better information on the long term impact of different policies.
Today CRFB released a paper, "Looking Beyond the Ten-Year Budget Window" which describes why it is important for lawmakers to focus on policies that achieve long term savings, even if those policies do not achieve substaintial savings in the 10 year budget window. The paper also provides information on what types of policies have savings that tend to grow or shrink over time. It also explains how replacing the sequester with equivalent mandatory cuts would be very good for the long term, and provides a variety of methods to measure savings beyond the traditional 10 year budget window.
The paper explains that not all ten-year deficit reduction is created equal, since policies could have significantly different effects over the long term. There are policies whose savings grow over time, including those that address a fast-growing area of the budget, are phased in over time, that start later in the decade, or that exempt new beneficiaries from changes. There are also policies which shrink over time as well, including temporary policies, ones which address a shrinking area of the budget, or policies which produce one-time revenue.
A well known temporary policy is the sequester, whose cuts technically end in 2021. The report shows that replacing the sequester with equivalent ten-year savings would actually be a boon to the budget over a longer time frame. For example, replacing half the sequester for five years with the chained CPI would be neutral over ten years but would save about $1.2 trillion in the second decade, excluding interest.
Replacing a Portion of the Sequester with Permanent Savings (billions)
Measuring savings over the second decade is not the only way to take a longer-term view of policies. The paper lays out six other ways which policymakers can measure fiscal effects. Some of them, including the second decade analysis and long-term actuarial analysis, have already been used by agencies like the Congressional Budget Office and Social Security Administration. Others include generational accounting, fiscal gap analysis, and steady state analysis. A description of these methods, their pros and cons, and the appropriate use of each can be found in the full paper.
Although debt levels may be stabilized in the short term, achieving deficit reduction over long term remains necessary to address the deficits and debt that are projected to rise to unprecedented levels. Thus it is critical that lawmakers are evaluating options appropriately and utilizing the full wealth of information that budget estimators produce to see the long term effects of policies.