Fiscal Cliff Debate: Entitlement Reform Must Be Included

COMMENTARY Budget and Spending

Fiscal Cliff Debate: Entitlement Reform Must Be Included

Dec 4, 2012 2 min read

Former Senior Fellow and Director of the Roe Institute

Alison served as Director of the Roe Institute at Heritage and is currently a Senior Policy Fellow at Americans for Prosperity.

Besides revelry, this New Year will ring in $500 billion in tax hikes and $110 billion in spending cuts unless Congress and the president can come together to steer clear of the "fiscal cliff" beforehand.

All the Washington handwringing is ironic, considering that Congress itself created this mess. How? By creating the sequester's ill-conceived spending cuts in the Budget Control Act of 2011 and teeing up expiration of many different tax policies (some in place for more than a decade) in legislation passed two years ago.

President Obama has repeatedly insisted on raising tax rates for high-income earners. This is an anathema to Republicans so the fiscal cliff looms. Obama called this a "balanced approach" to solving our fiscal challenges. But is it necessary?

Hardly. Tax revenues are quite low, but official budget forecasters from both the Congress and the White House show revenues returning to historical levels as the economy improves.

Spending is high today at just over 23 percent of the economy, versus the historical average of roughly 20 percent. But rather than returning to historical levels, spending will remain high over the next decade and then spiral ever upwards reaching nearly 38 percent of the economy within a generation.

This massive spending increase is driven by three entitlement programs—Social Security, Medicare and Medicaid. Costs will balloon as retiring baby boomers file into these programs. In just 13 years, when today's kindergarteners enter college, these programs plus interest on the debt will devour all tax revenues.

Entitlement reform is necessary, urgent, and inevitable.

Yet the fiscal cliff discussion has focused only on increasing taxes. What's missing - if we are serious about fixing our budget mess - are substantive steps to rein in entitlement programs.

Thursday's White House proposal has details on tax increases, but was shockingly devoid of details on spending. First, the president would increase taxes by nearly $1.6 trillion. Besides millions of families having less to go around on payday, this would also hit the engine of American job creation—small businesses.

It's hard to understand why this makes sense when the economy is still lumbering along and unemployment high. The president also wants a new $50 billion stimulus package. Americans know: new taxes don't usually go to deficit reduction, but more spending. All told these new tax increases, beyond those in Obamacare, would cover only 15 percent of the new debt in the president's budget.

There was a marker for potential entitlements savings of up to $400 billion. But the proposal was vague, and the savings aren't guaranteed, as they would happen sometime later only after the tax increases and new stimulus package.

Talks of a plan aren't really centered on the fiscal cliff. Congress and the president could come together quickly and simply pass legislation to steer clear of the cliff if they wanted to. Rather, it's about reaching a "grand bargain" to address our chronic deficits in advance of hitting the debt limit early next year.

Debt limit votes are typically painful for lawmakers. They usually do nothing to turn the tide of deficit spending. They are more like paying the piper for past deficit spending. The debt limit debate in 2011 was contentious precisely because we needed a major course correction. The debt limit vote focuses attention squarely on whether the budget is affordable and sustainable.

Such debates are necessary. Yet, the president's plan proposed to permanently eliminate the debt limit and allow unfettered deficit spending forever. Perhaps this is understandable given the $7 trillion of new debt in his last budget. But it is unacceptable.

A major course correction is still needed. That means solid entitlement reforms and plenty of checks and balances.

-Alison Acosta Fraser, as Director of the Thomas Roe Institute Economic Policy Studies, oversees Heritage Foundation research on a wide range of domestic economic issues including federal spending, taxes, energy, environment, financial markets, regulation and retirement savings. Fraser is a co-author of Saving the American Dream, the Heritage Plan to Cut Spending, Fix the Debt and Restore Prosperity.

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