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The Budget Arithmetic Test: Repairing Federal Fiscal Policy

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The current federal budget debate is sharply focused on implausible solutions that are bound to fail. The unsustainable deficits that are now anticipated cannot be repaired by the popular rhetorical fallback on cuts in domestic discretionary spending. A truly effective budget policy will require difficult political compromises amidst a tangle of political "third rails:" abandoning the unnecessary goal of a balanced budget, cutting funds for defense and entitlements, and increasing taxes. The public debate on budget reform should also recognize that the supply-side virtues of tax cuts and deficit reduction have been overblown, while the benefits of public investment for economic and social welfare have been routinely and blindly undervalued. This report begins with a critical overview of prevailing misconceptions in the federal budget debate. The focus then shifts to an analysis of budget decisions made over the past three years and the implications of the current debate for domestic spending. Finally, inescapable choices for the future are examined, including policy recommendations and conclusions.