Why Much Was Accomplished in the Debt/Budget Negotiations

By Aug 2, 2011, 6:15 AM Author's Blog  

Many are still debating how much was accomplished in the debt/budget agreement approved by the House today with the Senate to vote and the president to sign tomorrow. In my view, much was accomplished, and credit goes to all those who have been laying out the arguments and fighting hard for a return to sound fiscal policy as part of a pro-growth program to get the economy moving again.

You can see the impact of the agreement on spending with the following chart, which I have used before to show the recent federal spending binge and how to reduce it in a credible way.

Why Much Was Accomplished in the Debt/Budget Negotiations

It shows total federal government outlays—including both entitlements and discretionary spending—as a share of GDP for the past decade and the next decade under the various budget proposals. In previous posts and articles in the Wall Street Journal I have shown the top line, which is the original White House budget proposal submitted last February, and the bottom line, which is this year’s House Budget resolution due to Paul Ryan; this House proposal brings the budget into balance without any increase in taxes. The issue all year has been where between these two lines we would end up, and what would remain to be settled during the 2012 election.

The middle two lines show what has been accomplished this year. The line labeled “After BCA (Budget Control Act) Tranche 1” is the result of spending reductions agreed to in the Continuing Resolution of last spring and this past weekend’s agreement to cut and cap discretionary spending as part of the first $900 billion increase in the debt limit, along with adjustments in the CBO baseline. This all adds up to $1.4 trillion. The next line shows the additional spending cuts that will occur as a result of the second part of the debt limit increase, scheduled for the end of this year—another $1.5 trillion. (The “Tranche 2” line is drawn by distributing the $1.5 trillion amount to each year in the same pattern as outlay reductions in the “Tranche 1” line, though the actual pattern is yet to be determined.)

So it is clear that the budget has come a long way from the Administration’s first spending proposal—about half way to the House proposal—and it was accomplished without any tax increases. Some are disappointed that Washington did not do more, but there is no question that this represents a very big shift, even though the heavy lifting will go on with a good debate in the upcoming elections.

In addition to the hard work of those deeply concerned about the debt, the deficit, and the economy, an important idea or principle also deserves credit. This is the negotiating principle that “any debt limit increase has to be matched by spending reductions”—call it the Boehner principle. I wrote favorably about the principle in the Wall Street Journal in June and signed a letter with other economists supporting it when it was viewed as controversial, or even, as John Boehner said about himself today “when everyone thought I was crazy for saying it.” But because of its simple reasonableness and good economic rationale, it helped carry the day and achieve an important agreement.

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One Comment

  1. Paul Mancis says:

    I had understood from Republicans on TV that Obama had caused all the debt by his spending. If I am not mistaken, he became president in 2009, which is +/- after the peak in Govt spending vs GDP on your chart. So, in fact, it was under the Republicans that the need for debt was created. That doesn’t change the current situation or the point of your article. But its interesting in terms of the political rhetoric.

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