Deficit targets and triggers – gimmicks or the geniune article?

As America bumps up against the debt ceiling, Republicans and Democrats are talking about controlling the deficit through targets and triggers. Whether such a plan works depends on its design.

As Congress again nears the need to raise the ceiling for more US debt, talk in Washington is of tools to reduce the federal deficit. Both parties throw around words like “target,” “trigger,” and “enforcement mechanism.” The idea is to come up with a process that will force lawmakers to budget so that government lives within its means.

This discussion may be just a lot of political hoo-ha to make it look as if Congress is getting fiscally tough. That way, lawmakers have the cover to increase the nation’s debt limit so that the United States can continue to pay its bills.

A sure sign of Washington’s unwillingness to make hard choices is when everyone is talking about process instead of substance. Deficit targets and triggers are process. Spending cuts and tax increases are substance.

On the other hand, to do something truly substantive with deficit reduction would be nigh impossible by mid-May – when the US is expected to reach its current $14.3 trillion debt limit.

Economists warn of havoc if the debt limit is reached and Congress does not vote an increase: default on the government’s bonds and interest payments, a market meltdown, higher interest rates. Goodbye recovery, hello recession.

Bookkeeping tricks might win Congress a few more weeks on the debt-ceiling deadline. But even that won’t be adequate time to agree on how to cut defense spending or reform the tax code and entitlement programs such as Medicare. These are the kinds of tough decisions that need to be made to have real impact as annual deficits pile up into long-term debt.

For the moment, agreeing on a deficit-reduction plan – a process if you will – makes sense, given the debt-ceiling deadline. But whether a plan turns out to be political gimmickry or the genuine article will depend on its design. Congress has passed both kinds of fiscal measures in the past.

In 1985, the bipartisan “Gramm-Rudman” act sought budget discipline by triggering automatic spending cuts if the deficit exceeded certain fixed targets.

The problem with this plan was its dependence on deficit targets. Congress doesn’t ever “vote” on the deficit, which is the difference between government revenues and outlays. Also a problem: The definition of the target was open to interpretation.

Lots of things outside the control of Congress affect the deficit, including how well the economy is doing. A recession, for instance, will bring in less tax revenue even as spending on social programs increases. Lawmakers don’t want to cut spending during recessions. In the end, Congress simply ignored Gramm-Rudman.

Lawmakers did much better in 1990, when they passed the Budget Enforcement Act. That also had deficit targets, but it focused on what Congress could control – the budget. The law set budget caps and introduced “pay go,” a rule whereby Congress had to offset tax cuts or spending increases with equal and opposite measures to keep the budget balanced. Congress actually followed the act until it expired in 2002.

If, this time around, Republicans and Democrats agree on a process that pins everything on deficit targets, Americans will know that Washington is not yet serious about even the first steps to budget discipline.

If, however, the parties move toward spending caps on specific budget categories and an updated version of pay-go being called “save go” – automatic cuts and tax increases if targets are missed – then Americans will know Congress means business and not gimmickry. (The president’s bipartisan debt commission suggested that three-quarters of deficit reduction come from spending cuts; one quarter from tax readjustments.)

Of course, what Congress does, it can also undo or ignore, and therein lies the weakness of a “process” solution. But designed right, a road map to deficit reduction can work.

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