Bloomberg News

Grand Bargain Inadequate to Fix Fiscal Woes: BGOV Study

December 04, 2012

Even a so-called grand bargain might fall short of repairing U.S. fiscal woes.

A $4 trillion combination of spending cuts and tax increases over 10 years envisioned by Democrats and Republicans as a long-term fix would be inadequate, according to a Bloomberg Government study. Almost $6 trillion in deficit reduction will be needed in the next decade “to make a minimum down payment that puts the nation on a sounder fiscal footing,” the report said.

President Barack Obama’s administration and Republicans in Congress are negotiating ways to avert the fiscal cliff, the more than $600 billion in tax increases and spending cuts that will take effect in January unless Congress acts. An agreement would be an initial step toward a long-term deficit-reduction package.

The talks reached a stalemate late last week when Republicans rejected Obama’s proposal to raise $1.6 trillion in taxes, including by raising tax rates on the top 2 percent of earners.

House Republicans yesterday countered with a $2.2 trillion deficit-cutting plan that would trim Medicare and Social Security and cap tax deductions for top earners.

The BGOV study found that it would take a $9 trillion deal, “more than double the current level being discussed -- to ensure the country’s long-run fiscal soundness as the demands of an aging population and rising health-care costs put more strains on the federal government.”

Debt Ratio

A grand bargain of $4 trillion, “a package most likely to be put in place,” would put the ratio of debt-to-gross domestic product in 2022 at 80.2 percent, above the 2012 level of about 73 percent, according to the report. To stabilize debt-to-GDP at the 2012 mark, $5.9 trillion in deficit reduction would be required.

“I would see a $4 trillion deal as knocking the current five-alarm financial fire down to a more manageable three-alarm fire with limited risk of near-term ratings downgrades, though we would still be talking about eventual U.S. insolvency,” Mike Englund, chief economist of Action Economics LLC in Boulder, Colorado, said by e-mail when asked about the study.

“If we did a $6 trillion deal, it would return us to the pre-Obama financial situation, which was hardly perfect, but was manageable and with no ratings implications,” Englund said.

Republican Proposal

The House Republican fiscal-cliff proposal, in a letter yesterday to Obama from House Speaker John Boehner and other Republican leaders, seeks $800 billion in tax revenue in the next decade and would slow the growth in Social Security cost- of-living payments. It would reduce entitlement program costs by at least $900 billion, including raising the Medicare eligibility age, and cut $300 billion in discretionary spending.

The BGOV study, dated Nov. 30, was written by Robert Litan, BGOV’s director of research; Christopher Payne, senior economic analyst; Tony Costello, lead analyst; and Patrick Driessen, senior tax analyst.

The report uses assumptions about GDP growth, inflation and interest rates from the nonpartisan Congressional Budget Office.

To contact the reporter on this story: Ian Katz in Washington at ikatz2@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net


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