What the Fiscal Cliff Means for Deficit Reduction

Cuts in defense spending can significantly help reduce the federal budget deficit.

By + More

Chad Stone is chief economist at the Center on Budget and Policy Priorities.

Here's some good news about the budget that you may not know: Congress and the president have already enacted one of the major recommendations of the Bowles-Simpson deficit-reduction plan by implementing cuts in discretionary (i.e., non-entitlement) spending totaling $1.5 trillion in fiscal years 2013 through 2022. That's a big down-payment on halting growth in the federal debt (measured relative to the size of the economy) by the end of the decade.

As our new report explains, two fifths of these $1.5 trillion in savings come from defense, while the other three fifths come from reductions in domestic and international programs. In addition, federal borrowing will be less, resulting in interest savings that bring the total reduction in the cumulative 2013-2022 deficit to $1.7 trillion.

[See a collection of political cartoons on the United States budget and deficit.]

These cuts are measured from the funding levels that were in effect in late 2010 when the co-chairs of the President's Commission on Fiscal Responsibility and Reform, former Clinton White House Chief of Staff Erskine Bowles and former Republican Sen. Alan Simpson, issued their deficit-reduction plan. Bowles-Simpson has become the plan against which other deficit-reduction plans are typically judged.

Congress implemented these discretionary spending cuts in two steps. First, in April 2011 it reduced funding (appropriations) for fiscal year 2011 well below its 2010 level adjusted for inflation. Then Congress enacted the Budget Control Act in the wake of the showdown over the debt ceiling that summer. The Budget Control Act established caps on the funding for overall discretionary spending for fiscal years 2012-2021 as well as separate caps on defense and nondefense funding. 

[Check out our collection of political cartoons on defense spending.]

These actions, largely implemented the Bowles-Simpson recommendations for discretionary cuts, according to our analysis, and represent significant reductions. As the chart below shows, nondefense discretionary spending, which includes spending on an array of domestic programs ranging from education to law enforcement, food safety, and environmental protection, will shrink to its lowest level on record (data goes back to 1962) as a share of gross domestic product (GDP). As the chart also shows, the 2010 funding path against which the cuts are measured, was on a downward path already and was not inflated by the 2009 spike to fund temporary Recovery Act stimulus spending.

[See a collection of political cartoons on the struggling U.S. economy.]

While these reductions are significant, they are only a down-payment on the deficit reduction that will be required to put federal deficits and debt on a sustainable path. Long-term budget projections by the Congressional Budget Office, known as the CBO, show that policymakers could achieve the necessary further deficit reduction automatically by simply following current law, which calls for a number of tax cuts and temporary spending programs to expire at the end of this year and the automatic across-the-board spending cuts ("sequestration") required by the Budget Control Act because the special congressional committee established by that legislation could not agree on a deficit-reduction plan to go into effect. 

But allowing all those changes to take place permanently (going over the so-called "fiscal cliff") would most likely produce a recession in the first half of next year, according to CBO. In dealing with the budget challenges they face, policymakers should not let misguided fears about the fiscal cliff jeopardize long-term deficit reduction, but neither should they do too much deficit reduction too fast—which would put the economic recovery at risk. 

[RELATED: Read the U.S News Debate: Are Cuts to the Defense Budget Necessary?]

They should adopt the realistic target of stabilizing federal debt held by the public as a share of GDP, and they should craft a balanced plan in which revenues play a significant role as they have in past deficit reduction packages. Finally, they should recognize that significant spending cuts are already in place and that any plan that calls for further significant reductions in nondefense discretionary programs, especially through the crude tool of sequestration, is misguided. 

Nondefense discretionary spending has borne the brunt of deficit-reduction efforts since 2010 and is already scheduled to fall to historically low levels. Further steep cuts would eviscerate core government programs.

  • Read Fran Tarkenton: Obama and Congress Should Not Raise Taxes on Anyone
  • Read Peter Roff: President Obama Must Learn to Compromise
  • Check out U.S. News Weekly: an insider's guide to politics and policy