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A Do-Nothing Congress Would Balance the Budget (Almost)

Only Congressional Action Can Avert Massive Amounts of Automatic Deficit Reduction

SOURCE: flickr/bclinesmith

Congress could potentially balance the budget by simply doing nothing.

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Congress over the next 16 months will face some rather momentous fiscal decisions that will determine whether we maintain our current fiscal policies or if we change to a safer, more responsible course. These upcoming decision points are likely to spark several more rounds of finger pointing, shouting across the aisle, and irresponsible line-drawing on issues such as taxes, Social Security, and Medicare.

Unfortunately, given the influence of the Tea Party on conservatives in both chambers of Congress, the gap between Democrats and Republicans on these issues is wider than ever. But there is some surprising good news. If Congress is unable to agree on ways to solve the deficit problem over the next 10 years—if there is a deadlock and nothing passes—then our federal budget deficit will all but disappear.

Read the previous sentence again. That’s not a typo. (see Figure 1)

Chart 1

According to the recently updated budget projections from the nonpartisan Congressional Budget Office, if Congress does not pass any new fiscal policies between now and January 2013, the federal budget deficit will dwindle to just 1.6 percent of gross domestic product—the largest measure of our economy—by 2014, and continue dropping. Similarly, debt as a share of GDP will peak at 73 percent in 2013 and then decline down to 61 percent by 2021.

Those are not the sort of budget numbers that keep economists up at night. In fact, they are downright rosy. Why then, all the worry about the federal budget deficit?

The concern does not comes from what will happen if Congress fails to act, but what will happen if it does act. Right now, there are some incredibly important changes to federal spending and tax policies that are scheduled to happen without any further congressional action. And all of them would move the budget closer to balance.

The most recently enacted of these is the so-called triggered cuts in the debt ceiling deal that Congress passed at the beginning of August. That deal set up a special committee whose job it is to identify at least $1.5 trillion in deficit reduction over the next 10 years. If the committee cannot agree on a package of deficit reduction, or if Congress does not pass such a package, then $1.2 trillion in spending cuts will be triggered automatically. To avoid $1.2 trillion in automatic deficit reduction, Congress would have to pass a new law.

In short, if Congress doesn’t act then $1.2 trillion in deficit reduction is assured.

Similarly, if Congress doesn’t act on the Bush tax cuts, which expire at the end of 2012, we’ll get another $3 trillion in automatic deficit reduction. The Bush tax cuts are more responsible than any other legislation passed in the last decade for both our current and future deficits. These tax cuts are heavily tilted toward the very wealthiest, with half of the entire benefit flowing solely to the richest 5 percent of households. In 2010, the richest 0.1 percent of U.S. households enjoyed a tax break of more than $500,000 thanks to the Bush tax cuts.

Going back to the tax rates that were in effect under President Bill Clinton, when the economy grew at more than twice the rate it did under Bush’s rates—creating 23 million new jobs during the Clinton presidency compared to less than 3 million during the Bush era—would hardly be an economic catastrophe. If Congress can’t come up with the votes to extend Bush’s tax cuts, that inaction will, all by itself, cut the deficit by more than 40 percent.

Then there’s the alternative minimum tax that, without Congressional action, will generate hundreds of billions in additional revenue, an entire raft of business tax breaks that are all set to expire at the end of the year, and the Sustainable Growth Rate formula in Medicare, which would trigger automatic cuts to Medicare doctors. Congressional inaction on these policies will combine to reduce the deficit by another $2 trillion.

All told, if Congress does nothing, nothing at all, the deficit will come down by about $7 trillion over the next 10 years compared to a future in which Congress extends all current policies. That is an enormous sum—more than enough to stabilize the debt-to-GDP ratio and then put it on a sharp downward trajectory.

In fact, the do-nothing option actually yields far more deficit reduction that any other proposal on the table. The plan offered by the chairmen of the president’s fiscal commission, for example, would leave the country with about $1 trillion in additional debt compared to simply doing nothing. The budget plan passed by Republicans in the House of Representatives—the one that slashes Medicaid and abolishes Medicare as we know it—would incur approximately $1.5 trillion more debt than doing nothing at all. And of course, the do-nothing plan won’t demolish Medicaid and Medicare—another point in its favor.

Yet, Congress is likely to act on some of these policies and, in so doing, will, increase the federal budget deficit. But the good news is that even if they decide to extend certain policies, such as indexing the alternative minimum tax to inflation and fixing the sustainable growth rate formula in Medicare, the budget will still end up in pretty good shape. Even with the cost of those policies, the budget deficit would still fall to under 2 percent of GDP by 2014, and stay there the rest of the decade. Debt, as a share of GDP, would decline to 66 percent by 2021. Even throwing in the extension of all the expiring business tax breaks would still yield a stable debt-to-GDP ratio at about 70 percent.

Now, just because the automatic budget changes that are scheduled to transpire over the next 16 months would lead to enormous deficit and debt reduction does not necessarily mean allowing them to occur is the best approach. There are other considerations beyond just limiting the red ink. How would this approach affect job creation and economic growth? Who would bear the burden of deficit reduction done this way? Would it adequately solve underlying long-term budget problems?

These are all valid questions, the answers to which might lead us to seek another path. Indeed, the Center for American Progress has already laid out our vision for how best to achieve a balanced budget in a responsible, fair, and economically advantageous way. But as Congress spends the next 16 months debating deficit reduction, and if it decides to act in ways that end up making our deficit problem bigger, remember that there is a simple alternative—just do nothing.

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

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