Earlier today, the Peterson-Pew Commission on Budget Reform released a report proposing a budget path that aims to reduce debt held by the public to 60% of gross domestic product by 2018. The report addresses the long-term budget outlook, which poses real challenges to American economic security; stabilizing the public debt at a reasonable level is a desirable goal. However, the parameters of the Pew-Peterson fiscal target are neither reasonable nor desirable. The assertions that 60% of GDP “has become a recognized international standard,” and that credit markets must be reassured by assigning this target, are both unsubstantiated.
While the long-term fiscal outlook must be addressed, current fiscal policy must be framed in the context of the ongoing Great Recession. The economy is running about 6% below potential, unemployment remains unacceptably high (with dim prospects for near-term improvement), and a full recovery is not expected until 2015 at the earliest. Immediate deficit reduction would slow the economic recovery enough to possibly risk a double-dip recession, and significantly more fiscal stimulus is required to address the crisis in the labor market. The Recovery Act pulled the economy out of recession, but we now face serious economic head winds as that stimulus spending winds down and the state and local budget crisis intensifies. One wouldn’t pull the I.V. out a sick patient before they have returned to health – why would we pull out the economy’s one solid support – fiscal stimulus – before the recovery strengthens and unemployment falls?
The Pew-Peterson report in no way acknowledges the economic realities of the Great Recession or projections of prolonged, high rates of unemployment. Austerity measures are introduced in 2012 and rapidly escalated well before the economy is projected to return to potential, which we view to be grossly irresponsible. By 2015, the report proposes budgetary savings of $700 billion without specifying where those savings would come from. If extracted from the discretionary budget – including security spending – this would represent a draconian cut of 51% relative to current policy.
Our fiscal challenges primarily require addressing the medium-term problem of an antiquated, insufficient revenue code and the long-term challenge of spiraling health care costs. Immediate cuts to the non-security discretionary budget will cost millions of jobs, deprive the nation of desperately needed public investment, and undermine our economic recovery. We agree that fiscal policy should move toward stabilizing the public debt as a share of the economy, but this arbitrary 60% target is much too low and the fiscal adjustments required to get there by 2018 are unacceptable given the state of the economy.