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Whatever Else It Does, The Debt Limit Deal Reduces the Deficit

Newly Passed Budget Control Act Definitely Cuts the Federal Budget Deficit

SOURCE: AP/Senate Television

This video image provided by Senate Television shows the Senate floor on Capitol Hill in Washington, Tuesday, Aug. 2, 2011, after the Senate has approved an emergency bill to avert a first-ever government default with just hours to spare.

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Go ahead and criticize the debt deal passed by Congress and signed by President Barack Obama today. There’s a lot to dislike. Criticize it for being completely skewed toward radical right-wing priorities. Point out that it forces draconian cuts to some very important public investments, services, and programs. Complain that it does absolutely nothing for job creation, and in fact will actually cost jobs. Say all of that and more. But don’t say that the deal doesn’t have much deficit reduction.

One way or another, the debt limit deal will reduce the federal budget deficit by an annual average of about 1 percent of gross domestic product, the broadest measure of our economy. In a $16 trillion economy, that’s nothing to sneeze at. Yes, the way that the deal achieves its deficit reduction is unfair and damaging, but any suggestion that there isn’t much deficit reduction in the deal at all is just plain wrong.

Over the next 10 years, the Budget Control Act of 2011, the official name of the debt limit deal, will result in at least 2.1 trillion in deficit reduction, or about 1 percent of GDP. Assuming a “plausible baseline” in which the Bush tax cuts affecting income under $250,000 are maintained and the wars in Afghanistan and Iraq wind down, the savings from the new law will bring deficits down to an annual average of 3.3 percent from 2013 through 2021. (See chart)

Definitely deficit reduction

Obviously, the deficit reduction in this deal is not enough to produce a fully balanced budget, but assuming the expiration of the bonus Bush tax cuts for the wealthy, this deal will result in primary balance by 2017. Primary balance is when total federal revenue is equal to total federal spending, with the exception of interest payments on the debt.

Primary balance also is the point at which the ratio of debt-to-GDP stabilizes. If all of the Bush tax cuts are extended, however, the budget deficit will be substantially higher—a fact that merely underscores the importance of new revenue as we go forward. But the Budget Control Act contains a very substantial amount of deficit reduction, regardless.

Of course, it would have been better if that substantial deficit reduction had been achieved through a balanced approach, asking sacrifices from everyone, not just from the middle class and the poor, while simultaneously investing in key programs to help our economy grow over the long term so that we could reduce the deficit even more. As the deficit debate continues, it will be crucially important to highlight just how much of a burden this deal has placed on those who have already suffered disproportionately, and how the deal leaves little room to invest in our future prosperity. So go ahead and criticize the deal for hurting the middle class, for undermining public investments, and for ignoring the jobs crisis. Criticize it for being unbalanced and unfair. But don’t criticize it for not having enough deficit reduction.

Michael Linden is the Director for Tax and Budget Policy at American Progress.

See also:

  • The Deal by Michael Ettlinger and Michael Linden

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