Politics & Policy

What a Good Budget Deal Will Look Like

The House–Senate committee should reach a deal, and they can find a good one.

While losing the daily news competition to the ongoing self-implosion of Obamacare, the House–Senate budget conference grinds toward its December 13 deadline. Spawned by the deal to raise the debt ceiling and fund the government, the conference is tasked with building a budget agreement.

The recent budgetary history in Washington has conditioned the public not to expect a deal — and there is certainly a chance that this effort will match those expectations. Even optimists expect a “small” deal, if a deal does actually come to pass.

What would constitute a good deal? How can one separate the budgetary wheat from the deal-making chaff?

A good deal will meet four simple criteria. It will: (a) be built on good policy foundations, (b) reduce the deficit, (c) contain no tax increases, and (d) disappoint both ends of the ideological spectrum.

Good policy foundations. Policy improvement should be at the heart of any budget deal. On the defense side of the ledger, current law requires a $19 billion cut in 2014 spending only to be followed by a course-reversal increase of $25 billion over the next two years. Reductions to date have already impaired our armed forces’ readiness and sapped their strength. It makes no sense to inflict further damage on key capabilities for a year and then restore much-needed funds. Defense spending should rise smoothly over the budget window, even if it is kept at the same ten-year total.

On the non-defense side, it makes little sense to continue to focus cuts on discretionary programs when mandatory spending makes up the majority of the budget and is growing faster than anything else.

Mandatory spending includes entitlement programs that are funded on autopilot, including Social Security and Medicaid; discretionary spending is based on decisions made by Congress each year to fund certain programs, including education, social services, and transportation. In ten years, mandatory spending will consume 62 percent of the federal budget, so a deal should appropriately focus on mandatory spending.

Across-the-board cuts in discretionary programs can also be replaced with actual reforms of entitlement programs. The existing clumsy cuts starve worthy and unworthy programs equally, and leave in place the architecture of a social safety net that is failing Americans. Reforming programs can better align them with policy needs and make them fiscally sustainable.

Deficit reduction. Since 2007, the federal debt in the hands of the public has more than doubled as a percentage of Gross Domestic Product (GDP). Looking forward, debt-to-GDP briefly stabilizes over the next few years, and then is projected to climb unceasingly higher as Baby Boomer–fueled entitlement spending grows. High federal debt risks exposure to interest-rate shocks (federal interest payments will already be larger than the Pentagon budget in ten years), heightens skittishness in world financial markets, and slows the pace of economic growth. It is imperative that any deal take some potential red ink off the table.

No tax increases. One year ago the so-called “fiscal cliff” dealt a $600 billion tax blow to economic growth. The Affordable Care Act promises additional taxes this year and in the future. In short, the tax approach to our budget problems has already been tried. Moreover, there is nothing about higher taxes that is good for economic growth, and better growth will be essential to any real budgetary improvements.

Mutual disappointment. Also known as “getting a deal done.” If one side gets everything it wants, there is no reason for the other to agree to the deal. But both sides can claim a partial victory: The menu of no tax increases, sequester relief for domestic discretionary spending, improved national-defense policy, and less red ink should be appealing to all sides.

When the attention returns to the budget this December, let us hope that a deal appears, and that everyone knows a good deal when they see it.

— Douglas Holtz-Eakin is president of the American Action Forum.

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