Today, President Obama outlined his plan for putting our country back on a firm fiscal path to deal with our long-term debt problem. This is a huge step forward and an important development in confronting our fiscal challenges. (Click here to read CRFB's reaction to the President's plan.)
The President began by laying out succinctly how we got to this point and why it is imperative that we confront our mounting debt. He came close to joining our “Announcement Effect Club”
when he stated that “if our creditors start worrying that we may be unable to pay back our debts, it could drive up interest rates for everyone who borrows money – making it harder for businesses to expand and hire, or families to take out a mortgage.” He also noted the situation will get worse as the baby boomers retire.
Obama also confronted head on the misconceptions that preclude an informed public discourse of the subject. He mentioned how Medicare, Medicaid, Social Security, and national security account for about two-thirds of the federal budget, and how the recent budget haggling over domestic discretionary spending involved only 12 percent of the budget. As the President correctly noted, waste and abuse and foreign aid—popular targets—account for a miniscule portion of the budget. Tough choices will be required. He also took on many in his own party by declaring that reforms to Medicare, Medicaid, and Social Security will be required to ensure their long-term viability.
President Obama proposed a “balanced approach” to deficit reduction “that borrows from the recommendations of the bipartisan Fiscal Commission I appointed last year.” Obama’s plan calls for $4 trillion in deficit reduction over the next twelve years while the Fiscal Commission proposed about the same amount over nine years.
He presented a four-step approach to reducing the deficit: keeping domestic discretionary spending low; finding additional savings from defense; further reducing health-care spending; and reducing spending in the tax code (tax expenditures).
More specifically, President Obama proposed:
- Cutting non-security discretionary spending by $750 billion by 2023
- Cutting $400 billion in security spending by 2023
- Strengthening the Independent Payment Advisory Board (IPAB) to reduce health-care spending growth
- Eliminating the 2001/2003 tax cuts for upper income tax brackets when they expire in two years
- Reforming the tax code in a manner that simplifies the system and raises revenue, namely by limiting itemized deductions for the wealthiest 2 percent of Americans (saving $320 billion over ten years) and building on the Fiscal Commission’s tax reform plan that substantially reduces tax expenditures
- A “debt failsafe” trigger to ensure that, if by 2014 the debt-to-GDP ratio is not projected to stabilize by the end of the decade, spending cuts and reductions to tax expenditures will be required. The trigger is an important addition along the lines recommended by the Peterson-Pew Commission on Budget Reform.
The President also said that next month Vice President Biden will begin regular meetings with leaders in both parties with the goal of reaching agreement on a deficit reduction plan by the end of June. This process can build on the work of the “Gang of Six” senators who are working on a bipartisan, comprehensive fiscal plan.
Overall, the President offered a bold plan that seriously reduces the deficit. He focuses on most areas of the budget such as all of discretionary spending, mandatory spending, revenues, and further health-care reforms.
The framework offered by the President today is along the lines of what is needed to achieve the bipartisan support required to enact a plan. This is exactly the type of leadership we, and others, have been calling for from President Obama. As CRFB President Maya MacGuineas said in a statement
today, “[i]t is extremely encouraging to have the President joining the discussion.”