How to Balance the Budget and Create Long-Term Growth
My plan to solve our debt crisis.
As I traveled across Pennsylvania last year, I promised Pennsylvanians that I would dedicate myself to two key priorities in the United States Senate: restoring economic growth and private-sector job creation, and putting our federal government on a sustainable fiscal path.
These two goals are inextricably connected. We cannot maximize economic growth without getting our government’s finances in order. And we can’t get our finances in order if we don’t have the courage to make serious and tough choices right now.
Today, we are barreling toward a fiscal crisis like a downhill freight train. A few weeks ago, Standard & Poor’s essentially threatened to downgrade the United States’ AAA credit rating unless policymakers reduce our budget deficits. This announcement stunned the political and financial world, but after years of reckless spending it should not have come as a surprise.
In only the past decade — since 2000 — total federal spending has doubled. Last year’s level reached 24 percent of our nation’s economy — a post-WWII record and far higher than recent years have averaged. This spending surge has resulted in massive, record-breaking deficits. As recently as 2007, our deficit was only 1.2 percent of our gross domestic product. This year it is over 9 percent, or $1.4 trillion. Our government is borrowing about 40 cents of every dollar it spends.
The recent, huge deficits have, inevitably, created a mountain of debt. Over the past 20 years, our debt had remained fairly constant as a percentage of our national output, averaging about 41 percent of GDP. Today it’s 64 percent. It’s going to be 69 percent of GDP by October. This trajectory is clearly unsustainable.
President Obama and congressional Democrats have refused to show the leadership our country needs. The president’s budget proposal for fiscal year 2012 includes massive tax increases that will strangle job creation when our country is still struggling with an unacceptably high unemployment rate. His budget only exacerbates our fiscal crisis, adding $9.5 trillion to our national debt over the next ten years. And the president’s budget is silent on the major entitlement programs that are driving our medium-term deficits.
But at least the president proposed a budget, however inadequate. That is more than can be said for the Democratic-controlled Senate, which appears poised to go a second consecutive year without passing any budget at all.
This is an abdication of leadership that has to end. We need real spending cuts now, along with programmatic entitlement reforms and pro-growth tax policies. Together, they will put our government on a sustainable fiscal path and our economy in a strong growth mode. Congress needs to demonstrate the ability and the will to balance the federal budget within a reasonable time frame.
That is why I am introducing, along with a number of my Senate Republican colleagues, a responsible and commonsense budget for fiscal year 2012 that balances the budget in nine years.
My budget reaches a $50 billion surplus in 2021. It does so by gradually reducing spending to 18.5 percent of GDP and recognizing the strong economic growth that would accompany restored fiscal discipline and pro-growth tax policy. It reduces our publicly held debt from this year’s 69 percent of GDP to 52 percent by 2021. In short, it demonstrates that it is possible to balance our budget without job-crushing tax increases.
While Social Security, Medicare, and Medicaid all require structural reforms soon, it is neither necessary nor politically feasible to take them all on at once. Focusing on just the current ten-year budget window, my budget makes no changes to Social Security. Changes to Medicare are limited to restoring the fictitious and unspecified cuts projected in the president’s budget. For Medicaid, we adopt an approach similar to that of the House budget — block-granting Medicare funding to the states at reduced levels, while giving the states flexibility to devise their own systems for providing health care to the poor.
For defense spending, my budget adopts an approach similar to the one in the House-passed budget and the president’s budget. My budget, however, gradually phases out funding for the wars in Iraq in Afghanistan by 2018. Non-defense discretionary spending is reduced to 2006 levels and frozen for the subsequent six years. Mandatory spending apart from the big three entitlement programs is gradually reduced to slightly above 2007 levels by 2014, and then allowed to grow at the rate of consumer prices, with certain particularly misguided programs such as farm subsidies taking bigger cuts.
Reducing our deficit is just one part of the plan to get our economy moving again. Like the House-passed budget, my budget calls for job-creating, across-the-board tax reform that will enable us to dramatically accelerate economic growth.
I propose to dramatically simplify the tax code by eliminating special-interest tax credits and carve-outs for politically chosen winners. My budget would consolidate the current six individual-income-tax brackets into three, cut the top individual- and corporate-tax rates to 25 percent, and index the Alternative Minimum Tax for inflation. It would also move us to a territorial tax system so that we would no longer hinder economic growth by subjecting overseas profits of American corporate subsidiaries to double taxation.
I am not aware of any country that has ever dramatically grown its government, spent well beyond its means, run massive deficits, accumulated huge debts, monetized large portions of them, and then lived happily ever after. We won’t be the first. We will either stay on our current path and suffer the inevitable consequences of fiscal crisis and economic stagnation, at best; or we will change course and adopt the fiscal discipline and pro-growth reforms that will allow another American century.
The time to choose is now. And time is running out.
— Pat Toomey represents Pennsylvania in the United States Senate.