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The Globe and Mail

A real (and honest) plan to solve the U.S. deficit

It is an enduring mystery: Why do governments and bureaucracies make it appear so hard to implement the most modest restraint in public spending? On one hand, political leaders eloquently articulate the consequences of prodigal spending.

The two co-chairs of President Barack Obama's bipartisan commission on fiscal responsibility, for example, described U.S. prospects succinctly. "America cannot be great if we go broke," wrote Erskine Bowles (Democrat) and Alan Simpson (Republican) in their report, The Moment of Truth. On the other hand, the thrift program they recommend would increase the country's national debt by a further $4.4-trillion (U.S.) between now and 2020.

Mr. Obama's reformers crafted an austerity program stringent enough, they said, to avert a U.S. bankruptcy - an austerity program so stringent that Washington would be required to limit spending increases to 4 or 5 per cent a year (calculated from a bloated base) for the next decade. They implied a balanced budget in 2035 - provided, they conceded candidly in a draft version of their report, that the country experienced no years of slow economic growth, no further military conflicts and no natural disasters. Judging by Democratic and Republican responses, this minimal discipline was far too much restraint for the country's legislators.

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The Bowles-Simpson report warned that the U.S. must get rid of its "crushing debt burden," and called on Americans to "live within our means." The country must make sacrifices now for the sake of its children and grandchildren. The report proceeded to propose the following deficits ahead: in 2012: $943-billion; in 2013, $655-billion; in 2014: $469-billion; in 2015, $440-billion; in 2016, $456-billion; in 2017, $404-billion; in 2018, $332-billion; in 2019, $343-billion; in 2020, $333-billion - and so on for another 20 years.

By this kind of painstaking progress, U.S. deficits would decline from 8.9 per cent of GDP, its calamitous current level, to 1.2 per cent of GDP by 2020. At the same time, though, national debt would rise from $14-trillion, its calamitous current level, to $18.4-trillion. The obvious question is, why not simply freeze spending at its current level, bloated though it is? Would millions of lives be forever ruined if the United States imposed a zero increase in spending for even a few years?

The Congressional Budget Office has already calculated the math. In its economic simulations, the CBO determined that a comprehensive spending freeze would balance the books in five years, in 2016. This is 19 years faster than the Bowles-Simpson reforms require. And it would be much easier to implement.

Here's how the zero-increase option would pay off. Federal spending now: $3.5-trillion. Revenue now: $2.2-trillion. Deficit now: $1.3-trillion.

With a one-year freeze, spending remains the same in 2011 and revenue rises to $2.5-trillion. In subsequent years, revenue keeps rising - to $2.7-trillion in 2012; to $2.9-trillion in 2013; to $3.1-trillion in 2014; to $3.4-trillion in 2015; and (triumphant fanfare, please) to $3.6-trillion in 2016 - a surplus of $100-billion.

But let's say, arbitrarily, that an absolute freeze is politically impossible. Why not limit any increase, in this low-inflation environment, to 1 per cent? By CBO calculations, this would produce a balanced budget in six years and a few months. Or, for that matter, why not go for a 2-per-cent limit? By CBO calculations, this would produce a balanced budget in eight years, and requires no real cuts in government spending.

The Bowles-Simpson report did advance some interesting proposals. It proposed fundamental tax reform: By eliminating most tax deductions, the basic personal tax rate could be lowered to 8 per cent (from 15 per cent) for low-income earners; to 14 per cent (from 25 per cent) for middle-income earners; to 25 per cent (from 35 per cent) for high-income earners - and to 25 per cent (from 35 per cent) for corporations, making the U.S. corporate tax rate competitive again with Canada.

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The report also proposed a novel Social Security reform: Index the retirement age to longevity (by stipulating a minimum retirement age of 69 by 2075). It suggested that public sector workers be required to increase productivity by a minimum of 3 per cent a year - a truly radical proposition.

The most radical reform of all, however, remains an ever-elusive dream: a certain elementary honesty that might discourage politicians and bureaucrats from describing spending increases as spending cuts - and, worse, as cruel and callous spending cuts.

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