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Exchequer

NRO’s eye on debt and deficits . . . by Kevin D. Williamson.

Balancing the Budget, without Tax Hikes



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Nick Gillespie and Veronique de Rugy share the bad news:

Since Bill Clinton left the White House in 2001, total federal spending has increased by a massive 60 percent in inflation-adjusted 2010 dollars. In fiscal year 2010, which ended September 30, the federal government spent $3.6 trillion, or 25 percent of Gross Domestic Product. That’s the most spending, in terms of percentage of GDP, since 1946. Likewise, last year’s $1.5 trillion deficit, as a percentage of GDP, was the largest deficit since 1945.

Most economists talk about a debt-to-GDP ratio of 60 percent as a trigger point that makes investors very nervous about a country’s ability to pay its obligations. The debt to GDP ratio was 63 percent this year and the Congressional Budget Office (CBO) projects it will be 87 percent in 2020. Just three years ago, it was 36.5 percent.

In other words, stock up on bottled water and canned goods.

But they have, if not exactly a plan, then an argument that the budget can be balanced without higher taxes and without draconian cuts. They argue that higher tax rates will not produce higher revenue. I am a bit skeptical that there is some hidden law of taxation that ensures that government’s share of GDP cannot exceed 19 percent, a claim they endorse, but we can agree that, for whatever reason, federal revenue tends to stay in a fairly narrow band. But it is not that narrow: There’s a big difference between revenue equal to 15 percent of GDP (right about now) and revenue equal to about 20.5 percent of GDP (the millennial surplus). I’d prefer to see federal revenue equal to something more like, oh, 7 percent of GDP, presuming that federal spending also is equal to about 7 percent of GDP. We spend way too much, and 20 percent of GDP is way too much government for my taste, but I am not convinced that a government that spends 20 percent or 21 percent of GDP cannot collect 20 percent or 21 percent in taxes. (Again, not that I want it to.) And I also believe that the deficit is more dangerous right now, and worse for the country, than tax hikes would be. If you balance the budget and reduce spending, you can repeal a tax hike; you cannot repeal a fiscal crisis.

So, I think things are pretty dire and that radical action is needed. But Nick and Veronique argue for relatively painless cuts:

A balanced budget in 2020 based on 19 percent of GDP would mean $1.3 trillion in cuts over the next decade, or about $129 billion annually out of ever-increasing budgets averaging around $4.1 trillion. Note that these are not even absolute cuts, but trims from expected increases in spending.

Meaning, we’ve got a $1.3 trillion deficit, so cut $1.3 trillion out of spending growth in the next ten years and you’ve got a balanced budget.

Which is true. But you’ve also got ten more years’ worth of crushing deficits piling up, the economic effect of which is unknown. The United States is not much like Japan (it is not much like any other country) and it probably cannot carry a debt load of proportional weight. We do not which T-bill will be the one that breaks the camel’s back.

That being written: Cutting $1.3 trillion would be a heck of a good start — it beats the status quo. I’ll send John Boehner flowers if he announces $1.3 trillion in spending reductions.

But here’s a question for Nick and Veronique: Do we have ten years?

– Kevin D. Williamson is deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, to be published in January.


Tags: Debt , Deficit , Politics


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