The Bowles-Simpson Deficit Commission surprised everyone with its draft version of proposals to reduce our budget deficit and balance the budget. The bipartisan commission was established by President Obama by issuing an executive order on February 18, 2010. The commission has been tasked to come up with recommendations to the Congress and the White House by December 1, 2010. In addition, the recommendation report needs to be voted by 14 out of the 18 members on the panel.
The draft proposal, which has not been voted on by the panel member, identifies massive cuts in nearly every branch of government from the Department of Defense to Education. The draft proposal identifies billions of dollars in budget savings by reducing government outlays and by raising taxes. The measures that have been identified will reduce budget deficit to 2.2 % by 2015. The proposal identifies $ 100 Billion in cuts in defense spending, raises social security retirement age to 69 by 2075, increases gas tax by 15 cents, lowers corporate tax rate to 26 %, repeals Alternative Minimum Tax, scraps deductions on mortgages over $ 500,000, cuts federal workforce by 10 %, cuts farm subsidies by $ 3 Billion and eliminates in-school interest subsidies for student loans among other measures.
The proposal has been vehemently opposed by members of both parties and by representatives of labor unions and anti-tax organizations. United States had a budget surplus ($ 237 Billion) in 2000 under President Clinton. Even if the White House and Congress agree on all budget recommendations, it would still take us another 27 years to get back to a balanced budget in 2037. The proposal seeks to lower tax rates, simplify the code, broaden the tax base, cut spending in tax code, improve compliance, make America the best place to start and grow a business and reduce the deficit.
It will be interesting to see how Congressional leaders and White House react to the final recommendations. Investors have punished PIIGS (Portugal, Ireland, Italy, Greece and Spain) countries for their excessive debt levels. In May 2010, we witnessed nationwide strikes and protests in Greece when the government announced its return to fiscal austerity by raising taxes and cutting public spending. This issue is highly divisive and will certainly ignite flames amongst groups on both sides of the aisle in US. Labor Unions and other left leaning groups will likely fight over the reduction in public services. Right leaning groups and Anti-Tax organizations are likely to oppose any tax increase measures in the final proposal.
The panel understands that cutting public spending and raising taxes during a sluggish recovery, after the worst recession since the Great Depression, will probably derail our recovery. Therefore, the budget cuts and tax increase start gradually in 2012 and allows Congress and White House to waive the fiscal austerity requirements during years with low economic growth, unanticipated military conflict or major disaster. The panel seeks to lower deficits through a mix of spending cuts and increasing tax revenues—about 75% in spending reductions and about 25% from the tax side.
Interestingly, China’s Dagong Global Credit Rating Co. recently reduced its credit rating for the U.S. to A+ from AA, citing a deteriorating intent and ability to repay debt obligations after the Federal Reserve announced more monetary easing. Although, investors haven't taken this announcement seriously, it would be important for us as a nation to identify a clear path out of the record level budget deficits to prevent a Greece like spike on our treasury security yields going forward.
The feud between both parties will likely become deeper going forward. We should prepare ourselves for some highly heated and divisive debates between both parties on how to reduce our budget deficit and balance the budget. Businesses and Investors would want to have a more certain regulatory environment going forward. This would be the key for ensuring a faster recovery. Let’s hope that Washington takes the Deficit Panel’s recommendation seriously otherwise we will pass on a major issue that will haunt us for years to come.
The draft proposal can be accessed from [here](http://www.fiscalcommission.gov/sites/fiscalcommission.gov/files/documents/CoChair_Draft.pdf). Thanks to [Wikipedia](http://commons.wikimedia.org/wiki/File:110th_US_Senate_class_photo.jpg) for the picture.