Reconciliation 3.0 Should Be For Deficit Reduction

As lawmakers begin discussions over advancing a third budget reconciliation bill in the 119^th Congress, they should keep focus on the country’s massive deficits and debt, along with real concerns over affordability and program integrity

With debt now as large as annual output and deficits averaging about $2 trillion per year, it would require about $10 trillion of ten-year savings to reduce deficits to the 3% of Gross Domestic Product (GDP) target within a decade. Doing so would put the debt on a slow downward path as a share of the economy and keep exploding interest costs at bay while tamping down inflationary pressures, lowering interest rates for consumers and businesses, and boosting income growth.

Unfortunately, there have been some discussions of using the next reconciliation to facilitate further borrowing for everything from higher defense spending to new tax cuts. This would be a costly mistake. Although reconciliation cannot include reductions in discretionary spending or reforms to Social Security, it can and should be used to reduce deficits. 

We encourage lawmakers to follow the below criteria for a budget resolution and subsequent reconciliation legislation:

1. Focus on deficit reduction. The last two reconciliation bills are projected to add nearly $5 trillion to the debt through 2035. The upcoming budget resolution should instead facilitate the passage of legislation to reduce deficits, as reconciliation is intended to do. Lawmakers should target at least $600 billion of savings, in order to match the partial offsets promised under the House Fiscal Year (FY) 2025 budget resolution but not included in the One Big Beautiful Bill Act (OBBBA). A target of $1.4 trillion would also generate enough funds to replace the tariff revenue lost due to the Supreme Court’s ruling and not recovered with new actions. Below, we outline a $1.4 trillion illustrative package.
2. Carefully allocate and fully offset any new initiatives. Any new spending or tax breaks in reconciliation should be limited to what is absolutely necessary and should be fully offset separately from the $600 billion to $1.4 trillion of deficit reduction. If lawmakers abandon this deficit reduction, they should offset new costs twice over under Super PAYGO.
3. Promote affordability while reducing waste, fraud, errors, and abuse. Deficit reduction on its own can improve affordability by reducing inflation, lowering interest rates, and boosting incomes. Where possible, lawmakers should focus on policies that further improve affordability – for example, by lowering health care costs – and ensure scarce taxpayer dollars are going where they are most needed by reducing waste, fraud, errors, and abuse.
4. Craft a budget resolution that enforces the bill’s ultimate deficit reduction. While some House lawmakers pushed for OBBBA to include binding limitations on tax cuts in exchange for spending cuts, the inconsistencies between the reconciliation instructions between the House and Senate meant those limitations were not enforceable. Instructions should specify actual goals (not nominal cuts calling for at least $1 billion of savings from committees), align savings targets between the House and Senate committees, use Congressional Budget Office scores for savings provisions, and meet these targets honestly – without gimmicks like arbitrary expirations or baseline games.

The illustrative package below would reduce primary deficits by over $1.4 trillion over a decade while allocating $200 billion for new priorities such as increased defense spending. Savings would come mainly from lowering Medicare costs and reducing waste in that program, from combatting fraud and abuse in the Medicaid program and the Affordable Care Act exchanges, and by adopting a variety of policies supported by the House during the 2025 reconciliation process but omitted from the final OBBBA. Note that this package is purely illustrative and does not indicate endorsement by the Committee for a Responsible Federal Budget.

Illustrative Package for Potential Reconciliation Bill

Note: Savings estimates are rough and dependent on details and final scores.
*Significant interactions exist. For simplicity, we assume half of the revenue from each policy.
‘Close SDP grandfathering loopholes, reduce SDP cap to 100% of Medicare in all places, restrict use of IGTs, enact other smaller reforms
^Does not include IRS funding. Savings would come mainly from Medicare, Medicaid, Social Security Disability Insurance, Unemployment, and SSI. Savings would not be ‘scoreable’.

Lawmakers have the potential to significantly reduce deficits with a third reconciliation package, and they should do so to help ease inflationary and interest rate pressures; root out waste, fraud, errors, and abuse in the budget; and push deficits toward a more sustainable level. Enacting this package could help put the deficit on a path closer to 3% of GDP than current laws.

Regardless of the specific policies chosen, any package should improve our nation’s fiscal situation – not make it worse as we’ve seen with the prior two reconciliation bills.