How to cut the deficit

By , Alice M. Rivlin is director of the Economic Studies program at the Brookings Institution. This analysis is excerpted from the current issue of The Brookings Review.

The first stage (in a program to restrain domestic spending) is a one-year freeze in 1985, during which cost-of-living increases in benefits paid to individuals would be omitted unless prices rose more than 5 percent; appropriations for most other programs would be held at 1984 levels. Programs for low-income people would be exempted from the freeze.

The second stage would require more fundamental changes in domestic spending programs. The Brookings team identified four major areas of domestic spending in which reformers would produce substantial savings:

- The automatic growth in social security spending should be reduced somewhat to give the political system more flexibility in its allocation of resources between social security benefit increases and other federal activities. Reductions should be achieved through changes in initial benefits, not in the cost-of-living adjustment.

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- The new system of prospective rates for paying hospitals under medicare should be used to restrain the growth in costs to inflation plus 1 percent.... Further changes may be required in benefits or revenues if projections continue to predict large deficits in the medicare trust fund by the mid-1990s.

- Both the civil service and military retirement systems should be changed in order to bring them more in line with private-sector pension plans.

- Agricultural programs should be geared toward the stabilization of prices around long-term market-clearing levels. Deficiency payments should be ended.

Because defense outlays account for about 30 percent of all federal spending and are rising faster than other spending, they are an obvious source of possible deficit reductions. A more moderate and balanced growth could meet the administration's defense objectives more efficiently.

To bring the budget into approximate balance by 1989 would require substantial additions to revenues; if the spending cuts contemplated by the Brookings package were to be effected, a revenue increase of about $100 billion would be required to close the remaining budgetary gap.

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