The only credible way to seriously address the debt crisis is through spending cuts, not tax increases, says the International Monetary Fund (IMF).
In a recent study, the IMF writes, “the tax burden is already high in several advanced economies, which means that a large part of the adjustment will have to take place on the spending side” in order to achieve debt sustainability. And as noted by the American Enterprise Institute’s Kevin Hassett, based on that study, the most successful fiscal consolidations consisted of at least two-thirds spending cuts.
As Hassett writes, “A series of influential papers by Harvard University economist Alberto Alesina and various co-authors found decisive evidence that successful consolidations rely almost exclusively on spending reductions, while unsuccessful consolidations seek to close 50 percent or more of the gap with tax increases.”
This should be headline news, but it is not. The IMF study puts the lie to the half-measures of the Obama deficit commission, which depends on rosy economic growth and tax restructuring largely to get the budget under control. It also discredits the minimalist policies proposed by House Republicans in the Pledge to America — which only specifically mentions reducing discretionary spending by $100 billion.
While Republicans do deserve credit for highlighting the unsustainable spending in Washington — it helped them reclaim the House in November — part of the problem with the insufficient proposals thus far comes from not properly stating what the insolvency crisis faced by the United States actually is.
If Congress does not act to balance the budget and begin reducing the $13.8 trillion debt immediately, next year the Federal Reserve will become the number one holder of U.S. debt. Making matters worse, the debt will soar past 100 percent of the Gross Domestic Product in just a few short years. By 2018, if not sooner, our Triple-A credit rating will likely be downgraded by Moody’s, as noted by Investor’s Business Daily.
William Wilson is the President of Americans for Limited Government. He has spent his career working in political strategy and public affairs for various causes and organizations.