Daily Archives: November 22, 2011

To many the budgetary gridlock in the US may appear as intractable as that in Europe. But the reality is that the American situation is vastly more favourable. The reason is that  Congress has already passed laws sufficient to permanently fix its budgetary problem and put the nation’s finances on a stable path. All that is necessary is to do nothing and to let the laws on the books take effect.

As is well-known, America’s most serious budgetary problem is Medicare, the national health programme for the elderly. Its spending has been growing faster than the economy for years, a key reason why total US health spending as a share of gross domestic product is double that of countries such as the UK.

Back in 1997 Republicans and Democrats joined together to implement a programme that would permanently restrain the growth of Medicare spending. The key provision limited payments to doctors to those established by a formula called “the sustainable growth rate”.

The SGR formula worked fine for a few years, but as soon as it began to bite in 2003, Congress intervened to prevent doctors’ fees from being cut. It has continued to do so every year since. This annual exercise is known in Washington as the “doc-fix”.

But the original law remains in force. If it were simply allowed to take effect without congressional interference, payment to doctors for Medicare services would be cut by 30 per cent on January 1. That is not likely to happen. But if Congress would just rebase the SGR formula to this year, and allow it to operate from now on, it would save about $300bn over the next 10 years, plus another $50bn in debt service.

On the revenue side, a large number of tax cuts enacted since 2001 are scheduled to expire at the end of this year and next year. There is also a tax provision called “the alternative minimum tax” that has also been subject to an annual congressional fix to keep it from affecting too many taxpayers.

The largest of the expiring tax cuts are those enacted in 2001 and 2003 that cut the top income tax rate from 39.6 per cent to 35 per cent and reduced the rate on dividends and capital gains to just 15 per cent, among other things. These were previously scheduled to expire at the end of 2010, but at the last minute Barack Obama agreed to extend them for two years.

The so-called Bush tax cuts are now scheduled to expire at the end of next year. The Congressional Budget Office estimates that allowing them to expire on schedule, as well as foregoing another minimum tax fix, will raise revenues by almost $4,000bn through to 2021, plus saving almost $700bn in debt service.

Finally, there are $1,200bn in cuts for discretionary spending programmes, including national security, which will take effect automatically unless Congress comes up with a different deficit reduction package of equal size. A special congressional committee has been working for six weeks to come up with such a package by November 23.

On Monday, the joint select committee on deficit reduction announced that it could not agree on a viable alternative, thus leaving in place a $1,200bn spending cut beginning in 2013.

Thus we see that laws already in force would reduce projected deficits by approximately $5,500bn over the next 10 years, plus another $1,000bn in debt service savings. This is not enough to balance the budget, but it is sufficient to stabilise the debt-to-GDP ratio at its current level of about 60 per cent.

The problem, of course, is that neither Congress nor the White House has shown any inclination to allow the laws on the books to take effect. There are reasonable concerns about allowing a large fiscal contraction to take effect when the economy is still fragile, and it is not hard to come up with better ways of reducing the deficit than those now scheduled to take effect.

But the main constraint is politics. With the big scheduled spending cuts and tax increases taking effect in 2013, neither party is anxious to promise specific austerity measures going into next year’s presidential election. Everyone hopes their hand will be strengthened by voters and the burden of fiscal adjustment can be shifted elsewhere.

The fact remains that no new laws are needed to get the US on a stable fiscal course. At least as a political matter, this suggests that the prospects for deficit reduction are better in the US than Europe, where legislation still needs to be enacted to get debt under control.

The writer was a Treasury department and White House official in the Ronald Reagan and George H.W. Bush administrations. His book on tax reform, ‘The Benefit and the Burden’, will be published in January

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