Deficit Reduction

There is general bipartisan agreement that the U.S. cannot sustain its current fiscal path, with budget deficits exceeding $1 trillion annually and debt rising steadily relative to GDP. This near-term problem will only worsen in the mediumterm as the entitlements wave begins to crest. Almost 80 percent of the economists responding to this survey suggest that the country’s long-term budget imbalance might impact the nation’s ability to borrow.

Survey respondents were asked to rank a series of proposed solutions both in terms of their own preferences and in terms of effectiveness for bringing down the deficits. The table below shows the responses on various policy options.

The top preference is to simplify the income tax code and to reduce the number of loopholes. Indeed, when panelists were asked for other ways to reduce the deficit beyond the 13 listed, many cited tax changes. Some preferred marginal tax rate changes, while others expressed a desire for more structural changes (e.g., adding an income tax surcharge on higher-income groups, adoption of a flat or “fair” tax, switching to a national sales or consumption tax, or changing tax deductibility). Perhaps mirroring this discussion, the NABE Economic Policy Survey Panel scores the adoption of a value-added tax (VAT) as the top candidate for effectiveness in deficit reduction.

Respondents stress how important it will be for the president and Congress to delve into entitlement spending in order to make any serious dent in national spending. After tax reform, the second-most highly rated preference and effective choice is to increase the eligibility age for receiving Social Security benefits. Other changes to Social Security, Medicare, and Medicaid benefits were also noted.

Attempts to slow the growth in entitlement spending will be difficult politically. It is for that reason that many politicians and deficit hawks have asked for a bipartisan commission to make policy recommendations that will solve the deficit problem. Survey respondents strongly prefer such a commission that could make binding recommendations that would be voted on in the Congress without amendments—similar to the BRAC commission— to one that would not.

The third-highest-ranking option both from a preference and effectiveness perspective indicated by the panelists is the reinstitution of pay-as-you-go (PAYGO) rules, under which all new expenditures or tax cuts would need to be paid for. This was recently enacted by the Congress, and the economists surveyed think that it would be helpful. Giving the president some form of line-item veto authority also is popular among the economists surveyed.

Perhaps surprisingly—or as a reflection of how much the debate has shifted in the past couple of decades—the lowestranking option both in preference and effectiveness is passage of a Balanced Budget Amendment. Similarly, the re-introduction of restraints on spending similar to the Gramm-Rudman-Hollings provisions of the 1980s ranks poorly, and across-the-board spending cuts in discretionary programs receives mixed reviews. Nonetheless, several respondents cite a desire to cap spending or to set deficit reduction targets to some level of Gross Domestic Product.

Even with 13 options from which to choose, the list of possible alternatives was never meant to be all-inclusive. As noted, most of the survey respondents provide other ideas for reducing the deficit that are not listed on the table. Among the most noteworthy (not previously mentioned) include: (1) passing some form of comprehensive health-care reform to control medical costs in Medicare and Medicaid, (2) reducing defense expenditures—mainly by curtailing U.S. involvement in Iraq and Afghanistan, and (3) instituting multi-year budgeting or some other form of budget reform.

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