Release of 'Red Ink Rising'
Warning that the out-of-control federal debt places the economic future of our nation at risk, the Peterson-Pew Commission on Budget Reform this morning proposed a six-step plan for bringing U.S. debt to a stable level in the medium-term, and then to a more manageable level over the longer-term The bipartisan commission today issued “Red Ink Rising,” the first of two reports it will release.
The commission consists of a distinguished group of fiscal experts including former members of Congress as well as former heads of the Congressional Budget Office, Office of Management and Budget, and the Government Accountability Office. For the past year, the Commission has met to wrestle with a common concern—that the federal debt is out of control and that the fiscal future we leave to succeeding generations will lower their standards of living. Leaders must take action now to prevent that from happening.
Currently, debt held by the public is approaching 60 percent of the economy. Under reasonable assumptions, it is projected to grow steadily, reaching 85 percent of GDP by 2018, 100 percent by 2022, and 200 percent in 2038. Before the debt reached such high levels, the United States would almost certainly experience a debt-driven crisis—something previously viewed as almost unfathomable in the world’s largest economy.
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“The public debt is an economic time bomb that must be addressed by Congress and the Administration,” said David M. Walker, president and CEO of the Peter G. Peterson Foundation, and a commission member. “In this year alone, the public debt rose by nearly $2 trillion, and it is headed much higher in coming years. That kind of dramatic growth is not sustainable and threatens the foundations of our economy.”
Red Ink Rising makes clear that fiscal problems of this magnitude will take time to fix, especially in light of the current state of the economy. But it also emphasizes that creditors need to see that the United States is serious about stabilizing the federal debt over a reasonable timeframe. The Commission’s six steps are based recommendations that Congress and the President:
- Adopt an ambitious, but achievable, target that would reduce the public debt to 60 percent of GDP by 2018;
- Negotiate a specific package of spending reductions and tax increases that are gradually phased in to protect the recovering economy; and,
- Create an automatic enforcement mechanism to keep revenues and spending on target.
The biggest factor in whether Congress can succeed in this task is political will—members of all political persuasions will need to come together and make tough choices. Promises not to raise certain taxes or reduce certain benefits only stand in the way of a realistic plan. Any meaningful effort to address our fiscal problems will have to be bipartisan, giving both major political parties political cover from the tough choices. The commission leaves to Congress decisions about the right mix of policies. In this opinion piece, CRFB President, and commission member, Maya MacGuineas recommends a handful of policy changes that should be considered.
Why is debt a concern? As with personal credit cards or mortgages, the government cannot borrow for free and must pay interest. Interest payments, now at 6 percent of the budget, will grow to 15 percent by 2018, squeezing out other budgetary priorities. Every dollar spent on interest is a dollar that might be spent on research, education, or tax cuts.
Government borrowing also affects the cost of individual borrowing. Our creditors have traditionally seen the United States and its debt as a secure investment. But as concerns about our fiscal stability grow, investors may not want to buy more U.S. debt. The U.S. Treasury will then have to raise interest rates on U.S. bonds to attract the funds we need, further increasing the interest burden on the budget.
But it is not just the government that will pay more—families and businesses will have to pay more too. Everything from mortgages to school loans will cost more. So will business loans. Companies may not borrow money to expand their operations and entrepreneurs may be less likely to start new small businesses, the source of most new jobs in our economy. Ultimately, the economy will grow more slowly, wages will stagnate, and the U.S. standard of living will drop to well below where it should be.
Congress will soon, once again, raise the country’s debt limit so the lights can stay on through the holidays. Key senators are demanding the formation of a bipartisan fiscal task force to deal with U.S. fiscal problems in exchange for their votes to raise the debt ceiling. Unfortunately, lawmakers have not yet come together in the face of international concerns about how the United States is dealing with its debt. With average citizens across the country tightening their belts, the federal government must put together a fiscal management plan to secure our economic future.
Red Ink Rising calls on policymakers to make the tough decisions and enact both spending cuts and tax increases to shift our nation’s fiscal course. While implementing those policies should happen once the economy is on a path to recovery, committing to a plan happen immediately. It will be difficult, but policymakers can do it. Other nations from Canada to Sweden to Australia have done it. It would be better to suffer a little now than face the fate of other over-indebted nations.