Originally published in the Financial Times
It is a dispiriting time for fiscal sanity in the US. Evidence is growing that both political parties lack the courage to mount an attack on their nation’s budget challenge. Republicans and Democrats agree that recent elections signalled public demand for deficit cuts. But they also agree that voters will steadfastly oppose the necessary pain. Thus they tumble over each other to burnish deficit plans, which turn out to be tissue-thin, and aimed more at winning points than pushing reform.
The Republican proposals came first, their election success last November aided by a pledge to cut $100bn. But with only seven months left in the fiscal year, the party’s House of Representatives leadership concluded recently that $35bn would be more responsible. This misjudged the mood of Tea Party turks, who promptly rebelled – forcing their leaders to double the cuts package. Even this effort was more bold than brave. A figure of $100bn is less than 0.3 per cent of federal expenditures – a fly speck in the sea of US deficits. The tough-talking Tea Party also ruled that cuts in defence or popular “entitlement programmes”, such as Social Security and Medicare, were off-limits.
By constricting their notion of fiscal discipline, the Republicans have found themselves boxed into proposing massive cuts within a sliver – 12 per cent – of the federal budget. That, in turn, would mean slashing programmes – such as infrastructure and education – that the country most needs to protect its competitiveness. Amusing theatre, but dubious politics and terrible economics.
In his budget, Barack Obama struggled with the same figures, but succeeded only in applying a scalpel, rather than an axe, to the same 12 per cent. Trims were offered on defence, but entitlement programmes were again off-limits. The US president’s budget also ignored his own National Commission on Fiscal Responsibility and Reform. This earned him a slap from Erskine Bowles, the Democrat co-chair, who said the budget “goes nowhere near where they will have to go to resolve our fiscal nightmare”.
The contrast between Monday’s bland porridge and the feisty, can-do White House spirit that pushed through healthcare reform, financial services overhaul and more during Mr Obama’s first two years could not be more striking. But it was hardly surprising. Polls show people want the deficit cut through lower spending, not higher taxes or fewer entitlements. That this attitude makes no economic sense seems to matter little to political leaders, especially as the country enters presidential election mode.
Let’s get real. The “earmarks” that politicians love to talk about amount to $16bn this year. The present value of the US unfunded entitlement obligations is $50,000bn. The Bowles-Simpson commission, which garnered bipartisan support, at least hinted at the right path of how to cut this huge figure. Contained within its 65 pages are many sensible proposals, weighted about 80 per cent towards spending reductions and 20 per cent towards tax increases. Yet the results were immediately denounced by leaders of both parties, particularly the Democrats.
In his State of the Union address, Mr Obama offered his commission just one sentence of lukewarm recognition. But speaking on Tuesday, he emphasised a potential grand bargain between the two parties for reform. This sounds attractive, but such deals are difficult to deliver, especially with a presidential election looming. It would be simpler to dust off the sensible Bowles-Simpson report, and push for an up-or-down vote in Congress on its recommendations.
In a perfect world, politicians would restrain their animus towards particular provisions in recognition that, in its entirety, Bowles-Simpson would be a huge step forward. Failing that, such a vote would at least visibly separate the serious deficit hawks from those who just want to score a few political points.