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Budget dilemma is the most severe in 100 years

Wednesday 20 July 2011 - by Lawrence Goodman and Susan Hering

US policymakers need to turn to history to discover the most successful strategy to tame unchecked deficits, writes Lawrence Goodman, president of the Center for Financial Stability.

The stakes for the US economy are growing with each passing day of inaction on the fiscal front.

Europe's deep distress is a wake-up call for America. The time is now for a meaningful and lasting solution to unchecked fiscal deficits.

At the Center for Financial Stability, we have written a report evaluating history to uncover the most successful strategies to tame unchecked deficits. We draw the following conclusions.

- First, although both "discretionary" and "mandatory" spending have fueled the US deficit explosion, entitlement spending is the primary source of future deficit expansion. A budget deal that does not contain "mandatory" spending will fail.

- Second, the lesson from previous deficit reduction efforts - such as Gramm-Rudman-Hollings and the Budget Enforcement Act - is that BEA's budget rules provided more effective fiscal discipline than GRH's deficit targets.

Such rules will face a greater challenge this time around, though. The deficit is deeper now. Mitigating factors that enhanced rules' success in the 1990s are absent now.

Most critically, it will be harder to design and enforce rules to control entitlements than to contain discretionary outlays.

- Third, the greatest deficit reduction historically has been achieved not by rules, but by bipartisan agreements to permanently reform spending and taxes.

The present budget dilemma is the most severe in at least 100 years. History suggests that what failed in the past will likely fail again.

Unfortunately, what worked in the past will succeed if and only if a negotiated agreement mandates sweeping changes in spending and definitive shifts in taxes.

For our full report click here.

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