Budget balance requires large spending cuts
Without cutting spending on defense, veterans, Medicare, or Social Security, all other spending would need to be cut by 85%.
Republicans in Congress are preparing for the coming fight over raising the debt limit and implementing spending caps with some calling for a balanced budget amendment to the U.S. Constitution. The proposals come as the U.S. is poised to reach its statutory debt limit of $31.38 trillion, which will prompt Treasury Secretary Janet Yellen to begin using "extraordinary measures" involving cash on hand to stave off default. Lawmakers have until at least early June to raise or suspend the debt limit, setting the stage for a contentious debate that may see balanced budget amendment proposals get a vote.
“Balancing the budget would require nearly $15 trillion in deficit reduction and savings over a decade which would be extremely challenging, and possibly unachievable based on political resistance to spending cuts in key areas.”— CRFB Senior Policy Director Marc Goldwein.
According to an analysis by the nonpartisan Committee for a Responsible Federal Budget (CRFB), balancing the budget over the course of a decade would require a 26% cut to all federal spending. Further, the CRFB found that figure would rise to about 85% if lawmakers avoided politically challenging cuts to spending on defense, veterans, Medicare, and Social Security.
The exact amount of savings needed to achieve a full budget balance is uncertain and will depend on budget projections from the Congressional Budget Office’s ten-year baseline and the impact of any proposed policies.
According to the CRFB Fiscal Blueprint for Reducing Debt and Inflation, achieving balance would require approximately $14.6 trillion in deficit reduction through 2032, including over $2 trillion in policy savings and nearly $400 billion in interest savings in 2032 alone. To reach these savings without additional revenue, the CRFB estimates that all spending in 2032 would need to be cut by 26%, rising to 33% if defense and veterans spending are excluded from the cuts.
To give a sense of its magnitude, this cut would result in a typical new retiree’s annual Social Security benefits being reduced by $10,000 to $13,000 in 2032. Additionally, it would lead to laying off 1.1-1.4 million federal employees (which is more than two-thirds of the civilian workforce) and removing 20 to 25 million people from Medicaid eligibility. Excluding Social Security and Medicare from cuts would make the task of achieving balance even more unrealistic.
Without cutting spending on defense, veterans, or Social Security, all other spending would need to be cut by 51%. If Medicare were also excluded, the remaining spending would need to be cut by 85%.
The figures mentioned above do not take into account additional savings that may be necessary if policymakers decide to extend $3 trillion worth of tax cuts that have expired or are set to expire in the coming years.
To give an idea of the difficulty in achieving a balanced budget in 2032 through controlling spending alone, it would require one of the following:
Eliminating virtually all defense and nondefense discretionary spending programs;
Cutting Medicaid spending in half while eliminating all other mandatory spending outside of Social Security and Medicare;
Eliminating all nondefense discretionary spending and ending the entire Medicaid program;
Repealing Medicare, all income security programs, and all refundable tax credits; or
Discontinuing all Social Security retirement and survivors’ benefits.
While it is possible to make the task more feasible by adopting a combination of different types of spending reductions and reforms along with new revenues, user fees, and stronger economic growth, even then, achieving balance within a decade is incredibly challenging. Even the $7 trillion CRFB Fiscal Blueprint, which puts all parts of the budget and taxes on the table, would only reduce the 2032 deficit to 2.9% of GDP (down from 6.6%), still far short of balance when incorporating stronger economic growth effects.
Instead of aiming for balance within ten years, it would be more practical to set different targets or timelines such as:
Balancing the primary (non-interest) budget;
Reducing or stabilizing debt as a share of the economy;
Setting a ten-year savings target, such as $7 trillion in deficit reduction or $4 trillion of non-interest spending cuts; or
Setting a longer period than ten years.
Achieving a balanced budget within ten years is likely unfeasible – and virtually impossible if major parts of the budget and tax code are exempt from change. Policymakers should set aggressive but realistic fiscal goals, keep all areas of the budget on the table, and put forward policies to begin reducing deficits. The first step is to avoid actions that would worsen our already unsustainable fiscal situation. Policymakers should agree not to pass legislation that calls for any new borrowing.