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On the Fiscal Cliff, Entitlement Reform Is Key

November 27, 2012

In discussions on the fiscal cliff, Democrats have repeatedly talked about wanting to raise taxes. In contrast, they have said very little about strengthening entitlements. Democrats admit Congress must act on entitlements, but they have not proposed any meaningful reforms. Shoring up entitlements will have a far greater effect on the future stability of our economy and debt than tax increases. Discussions over how to deal with the pending fiscal cliff, and averting a fiscal crisis, will have to include serious entitlement reform. 

No Amount of Tax Revenue Will Fix Entitlement Spending

While marginal income tax rates have varied historically, government revenue collected has stayed within a limited range – between 15 and 20 percent of gross domestic product (GDP) in the post-WWII era. In coming years, entitlement and interest spending will skyrocket so quickly that typical levels of government revenue will be inadequate. Even if the federal government were to match the record collections of fiscal year 2000, the highest revenue level since WWII ended, it would fall dramatically short of what Washington will spend on just entitlements and interest.

Entitlement spending will exceed even record revenues

entitlements vs revenue

Source: OMB Historical Tables, CBO Long-Term Alternative Scenario

Democrats Admit the Need for Entitlement Reform

“Medicare in particular will run out of money … it’s not an option for us to just sit by and do nothing … [I]f you’re a progressive who cares about the integrity of Social Security and Medicare and Medicaid … then we have an obligation to make sure that we make those changes that are required to make it sustainable over the long term.” – Barack Obama, July 11, 2011

The Obama Administration has not proposed any real entitlement reforms. Instead it included $1.9 trillion in tax increases in its fiscal year 2013 budget. Even the proposed Obama tax increases wouldn’t fix the problem.

The President’s budget projects tax revenue will be 20 percent of GDP from 2022 through at least 2085. The fact is the U.S. has only had tax revenue over 20 percent of GDP twice since 1930, and once since the end of WWII. But even with that record amount of revenue, the Obama plan cannot constrain our deficits.

Obama’s entitlement status quo leads to permanent red ink

 permanent red ink

Source: OMB

We Cannot Maintain the Status Quo

Entitlement spending and interest costs are by far the largest drivers of increased spending beyond the current 10-year budget window. While interest costs are a product of all tax and spending decisions, bringing entitlement increases under control will greatly help to contain these costs. Showing markets that the U.S. government is willing to tackle its debt problems will also help to limit future interest rate increases.