With the endless coverage of all the political and economic drama over the fiscal cliff, one important fact seems to be missing: Both plans -- President Obama’s and House Speaker John Boehner’s – fall short of meeting the generally agreed upon goal of reducing the debt by $4 trillion over the coming decade. That’s according to a new analysis by Steven Rattner, a private equity investor and the former auto industry advisor to the Treasury Department. Rattner’s work shows that even factoring in the $1 trillion of savings agreed to a year ago, Obama’s plan would achieve only $3.4 trillion of deficit reduction between 2013 and 2022, while Boehner’s House GOP approach would save $3.6 trillion.
Those shortfalls highlight the heart of the dispute between the White House and congressional Republican leaders: Obama wants to achieve nearly half the long-term savings by raising taxes by $1.6 trillion, but only 17 percent of the savings through reductions in Medicare and other entitlement programs. By contrast, roughly a third of the GOP savings would come from entitlement reforms but only 22 percent by boosting revenues by $800 billion, according to Rattner’s analysis.
In short, the Democrats would have to agree to tougher measures to slow the growth of entitlements and the Republicans would have to go along with more in taxes – perhaps as much as $1.2 trillion – to hit the long-term deficit reduction target. That would result in a deal with a 2.5 to 1 ratio of spending cuts to revenue increases, which many centrist groups and fiscal commissions contend is the proper balance.
“You could easily see a compromise if you increase the amount of revenue relative to the Boehner plan and you increase a little of the spending cuts relative to the Obama plan and you end up at $4 trillion,” Rattner told The Fiscal Times in an interview today. “But that’s not always the way negotiations progress.”
After four years of trillion-dollar-plus deficits, the government’s debt-to-GDP ratio has climbed from 36 percent in 2007 to 73 percent. If nothing is done, that ratio would soar to 90 percent by 2022. It would take at least $4 trillion of revenue increases and spending reductions over the coming decade to get the ratio down to roughly 68 percent, or where it was a year ago.
“That strikes us as our minimal bogey,” Rattner said. “In a perfect world, you’d like to get that ratio to go down; you would like to pay down debt. But in an imperfect world, at least you want to keep the problems from getting worse. So to do that you need $4 trillion of savings, whether it’s tax increases or spending cuts over the next ten years.”
According to Rattner’s analysis, the president’s long-term deficit reduction strategy is a mix of 47 percent tax increases, 17 percent entitlement savings, 19 percent reductions in discretionary spending on government services and programs, and 17 percent miscellaneous savings. Boehner’s approach, by contrast, is a mix of 22 percent increased revenues, 31 percent entitlement cuts, 31 percent discretionary savings and 16 percent all others.
Rattner, who has called himself “a proud alumnus” of the first Obama administration, said that Congress and the administration must be careful not to undermine the economic recovery by cutting too deeply into discretionary domestic programs and services, including the social safety net. “What Obama is trying to say in his proposal – and I agree with this – is that there’s really a limit to how much of that you can do” without harming the economy.
With entitlements, “the president has proposed $350 billion in health care savings and $250 billion to other stuff for a total of $600 billion,” he said. “Boehner is at $900 billion, plus a change in the Social Security formula , which Obama hasn’t signed on to yet – although I think he will – for $1.1 trillion. And again, I think there’s someplace in between that you can get to make it work. I don’t think there’s a magic number. I just think Obama is too light on [entitlement savings], and I don’t think the Democrats will ever accept the magnitude of what Boehner is talking about.”
Unless the White House and Congress can agree on a package of savings and tax increases before the end of the year, about $600 billion of tax increases domestic and defense spending cuts will automatically kick in on Jan. 2, likely triggering a fiscal crisis that could hurt the economic recovery. Although negotiations between Obama and Boehner have stalled, Rattner thinks the two sides will work through their differences before year end.
“I’m less concerned, frankly, with what’s in the deal,” he said. “I think there’s a lot of different ways you can get to an acceptable number. I fear that as these negotiations progress and as the things that each side basically says, ‘I can’t do that,’ they simply come out of the package, as opposed to being replaced by something else.”
Rattner added, “For reasons I can’t defend or explain, I think they will find their way through this because the notion of going over the cliff is so crazy. I’m certainly worried about going over the cliff, but I’m just as worried, maybe more worried, about them chickening out and not doing something as robust as what we need to address the [debt] problem.”