Want to know a secret? The mandatory budget cuts and tax increases are working. They are helping whittle back the deficit.
The Congressional Budget Office’s latest projection for our annual budget deficit is $642 billion. That’s a significant drop from $1.087 trillion only a year ago. Economists attribute the remarkable reduction to higher revenue growth and less spending.
Some of that higher revenue can be attributed to economic growth. But it also includes revenue produced by the smattering of higher tax rates that Democrats insisted on – and enough Republicans agreed to – as 2013 began.
Alongside that revenue is a decline in federal spending. This is the second year in a row with reduced spending. The budget cuts, which came about largely because Congress could not reach a “grand bargain” budget deal in 2011, have contributed to the decline, too.
There are some instructive political lessons in this surprising good news.
Let’s start with the cuts.
The process may be a crude, blunt and inefficient force, but the automatic spending cuts have gotten the job done. True, cuts are causing problems in some communities and parts of the government, including the military and the judiciary. But communities and government agencies are adapting. And the larger macroeconomic payoff – those lower deficits – matters a great deal.
The lesson in this tale extends to the tax hikes. Increasing rates may not be the best policy if you want to keep revving up the economy. But the economy has not slammed into reverse. And the extra tax revenue is helping the bottom line.
We now need to take these lessons and apply them to our next fiscal reckoning. Americans may be sending the annual deficit into retreat, but it is tame compared with the overall federal debt. As a nation, we still owe our creditors $16.7 trillion from the accumulation of deficit spending over time.
Reversing that trend will be like turning a battleship. The mandatory cuts and recent tax hikes have helped us start turning the ship, but we won’t really make progress until we deal with the underlying problems of rising entitlement spending and an inefficient tax code.
By now, it is pretty clear that Social Security, Medicare and Medicaid will be a huge cost to the country as those of us who are baby boomers make our way through our retirement years. This reality forces a choice on Washington: Congress will either go through a bloody battle to keep Social Security, Medicare and Medicaid financially healthy, or those good programs will swamp us fiscally.
The same is true with our tax code. It is loaded with exemptions, loop-holes and technicalities. They make it an inefficient system, which can deter businesses from investing more in the economy and allowing capital to flow freely into productive uses.
But simplifying the tax code is a beast of a political problem. Lobbyists know precisely how to protect their clients from any change that could hurt them but help the nation. And the truth is, most of us don’t want to lose the goodies that the tax code provides.
Yet there can be a benefit to giving up some of those exemptions, along with changing our entitlement programs.
That’s the lesson from the messy budget cuts and tax hike fights. The skirmishing is brutal, but we can reach a better place.