What You Need to Know About the Bowles-Simpson Deficit Plan

Most policymakers and pundits don't actually understand much about the deficit reduction plan.

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

Policymakers and pundits of all stripes regularly invoke "Bowles-Simpson" as the kind of deficit-reduction plan they could support—without necessarily understanding much about it. To rectify that situation, the Center on Budget and Policy Priorities has issued a new report reviewing what former President Clinton Chief of Staff Erskine Bowles and former Sen. Alan Simpson, cochairs of President Barack Obama's Commission on Fiscal Responsibility and Reform, actually proposed and how those proposals fit into current budget debates.

Forget the numbers you might have in your head about Bowles-Simpson. Here are the relevant ones for today's budget policy discussions: 

  • Projected 2013-2022 budget deficits would be $6.3 trillion smaller under Bowles-Simpson's proposals than under the policies in place when the plan came out.
    • That deficit reduction comprises $5.5 trillion—roughly equally divided between revenue increases and program cuts (see chart below)—and about $800 billion of interest savings due to reduced federal borrowing.
      • Policymakers have already enacted over half of the proposed $2.9 trillion in program cuts through $1.5 trillion in cuts in discretionary (i.e., nonentitlement) spending, as I discussed here last week. Those cuts will generate about $200 billion of interest savings, for a total of $1.7 trillion in deficit reduction.
      • [See a collection of political cartoons on the budget and deficit.]

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        These numbers differ in a couple of respects from those often associated with Bowles-Simpson. Of particular importance, the Center on Budget and Policy Priorities measures deficit reduction from a different starting point—one that reflects the current practices of many budget experts and policymakers of both parties. The Center on Budget and Policy Priorities, the Tax Policy Center, the Concord Coalition, and the Committee for a Responsible Budget all now use a "current policy" baseline as their starting point that assumes policymakers will extend all of the Bush-era tax cuts and most other tax provisions scheduled to expire at the end of this year. Bowles-Simpson, by contrast, adopted a starting point that assumed that policymakers would extend most expiring tax provisions but not the upper-income Bush-era tax cuts. In other words, Bowles-Simpson subsumed over a trillion dollars of revenue increases into its baseline; Center on Budget and Policy Priorities treats the expiration of the upper-income tax cuts as explicit Bowles-Simpson budget savings.

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

        Bowles-Simpson is a very aggressive deficit-reduction plan. It reduces the deficit so sharply that federal debt held by the public falls relative to the size of the economy (measured by gross domestic product or GDP). As Federal Reserve Chairman Ben Bernanke and others have warned repeatedly, reducing the budget deficit by too much, too fast, puts the recovery at risk. A better budget plan would actually provide a boost for the recovery over the next year or so while putting in place a deficit reduction plan that achieves the necessary and realistic medium-term target of stabilizing the debt-to-GDP ratio.

        Thus, Bowles-Simpson is far from an ideal fiscal policy. But if Bowles-Simpson is going to be part of the budget discussion that will take center stage after the November elections, policymakers must understand the facts that Center on Budget and Policy Priorities delineated in its report on that plan. Bowles-Simpson calls for roughly equal amounts of revenue increases and program cuts. Policymakers have already enacted half of the program cuts. Thus, implementing the rest of Bowles-Simpson largely entails raising more revenue.

        • Read Lawrence H. White and James Broughel: Is It Time To End the Federal Reserve?
        • Read Mike Whalen: Eliminate the Capital Gains Tax
        • Check out U.S. News Weekly: an insider's guide to politics and policy