Deficit Reduction Talks to Set Stage for Decades

May 2, 2011

Congress returns today from a two-week recess, and much of its attention will turn to plans to reduce budget deficits and raise the country’s debt ceiling. Before their departure, the House and Senate put the finishing touches on a final FY 2011 spending bill that averted a government shutdown. The House also passed a FY 2012 budget resolution (H Con Res 34) that brings non-security discretionary spending to below 2008 levels.

House Budget Committee Chairman Paul Ryan has been applauded by The New York Times columnist David Brooks for "the most comprehensive and most courageous budget reform proposal any of us have seen in our lifetimes" because it enlarged the discussion to address problems with Medicare and Medicaid, thus "reframe[ing] the domestic policy debate." Although the Senate will likely vote on the Ryan budget resolution in the coming weeks and perhaps the President’s FY 2012 budget, neither is expected to pass.

Budgets experts say that what is on the table for deficit reduction will affect what happens for decades to come. Ryan has refocused the debate, and now the House and Senate must determine which of many proposals provide the best path forward.

The President released a deficit reduction plan that cuts spending (including defense spending), raises revenues, and protects investments in education, innovation, and infrastructure. It also postpones debates on health care costs and tax reform, two issues on which the parties differ. Vice President Biden is scheduled to meet with a group of House and Senate leaders this week to begin negotiations on a long-term, bi-partisan deficit reduction plan.

As the Biden-led talks begin, another major bi-partisan group called the Gang of 6 is expected to roll out its deficit reduction plan that is based largely on the Bowles-Simpson Commission report. The plan will likely call for reducing discretionary and entitlement spending, while also raising revenues.

The issue of deficit reduction will loom large as the House and Senate begin consideration of raising the nation’s debt limit. Although the nation will reach the debt limit by May 16th, "accounting maneuvers" will allow the country to avoid default until July. Democrats are urging that deficit reduction and debt limit talks occur in parallel, while at least some Republicans have signaled that they want to link debt limit increases to spending cuts.

If the bipartisan negotiations of the Biden-led group and the Senate’s Gang of 6 fail to produce agreement, spending cuts could be achieved through proposals to set global spending caps. These proposals set a cap on the federal debt as a percentage of GDP (gross domestic product), with the goal of reducing the percentage from 24% to around 20%. The spending cap proposals, however, reduce the deficit solely through cuts in spending and would likely have more significant implications for not only entitlement programs, but the domestic discretionary portion of the budget which includes funding for science.

Serious decisions about deficit reduction are now upon us, but these discussions must also include consideration of what’s at stake and the least painful way to get there.