By Tom Curry National affairs writer
updated 7/25/2011 8:36:31 PM ET 2011-07-26T00:36:31

Percentages sometimes shed more light on events than absolute numbers do.

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House Speaker John Boehner is proposing deficit reductions, done in two stages, of a total of about $3 trillion over 10 years, while Senate Democratic leader Harry Reid is offering a plan that would cut deficits by $2.7 trillion over 10 years.

According to what the Congressional Budget Office has forecast, both of these proposals would be inadequate to keep the debt from growing above the level it will reach by the end of this fiscal year, about 70 percent of gross domestic product, or GDP.

Publicly held debt is now at its highest level than at any time in American history other than the period after World War II when all those aircraft carriers and bombs were being paid for.

The debt level has the bond rating agencies sounding the alarm, partly because the Baby Boomer-driven surge in spending on Medicare and other entitlements has only just begun.

Sounds like a lot, but...
Assume that $3 trillion in cuts over ten years would actually occur.

That might sound like a lot. But $3 trillion in cuts over 10 years would be a 6.5 percent reduction in cumulative spending and about a 45 percent reduction in cumulative deficits.

But that’s only if you measure based on the budget baseline which the Congressional Budget Office is required by law to use.

Video: Leaders unable to agree on debt ceiling (on this page)

That baseline assumes some quite improbable things will happen, such as reverting to the 2000 income tax rates and making the cuts in Medicare’s payments to doctors under what’s called the Sustainable Growth Rate (SGR). Congress has circumvented those SGR cuts for the last several years, not allowing them to take effect.

Story: Obama's full address on debt ceiling impasse

If you use CBO’s more plausible “alternative fiscal scenario,” deficits will total $12.8 trillion over the next ten years.

A $3 trillion cut would be about a 23 percent reduction in cumulative deficits over the ten years.

In a recent report, CBO said that in order to keep the debt from rising above the level it will reach by year end, cumulative deficits over the next ten years would need to be roughly $7.6 trillion less than what’s forecast to occur under CBO’s alternative scenario.

Video: Democrats, Republicans promote separate plans (on this page)

In other words, what’s needed is about $5 trillion in cumulative deficit reductions over ten years — far more than what either Boehner or Reid is seeking.

Boehner and Reid are setting goals, but the failed SGR is a good lesson in why one should be wary of how real the proposed cuts might turn out to be.

When federal spending dropped
Over the past 40 years, only once has federal spending declined in dollar terms: that was last fiscal year, FY 2010, when it dropped by about $62 billion.

And here's why economic growth matters so much: measured as percentage of national income, or GDP, there have been 19 years in the past 40 years when federal spending declined.

It can happen. And it happens when — as in the nine-year run from 1992 to 2000 — the economy is growing at a rate of three to four percent a year. (And in the final years of that period, tax revenues were growing despite, or because of, tax cuts enacted in 1997.)

In the past, there have been some parts of the budget that have been cut by very big amounts, both in nominal dollar terms and as a percentage of total federal outlays.

Story: Boehner's full rebuttal on debt ceiling impasse

For instance, from 1992 to 1999, defense spending was cut from $298 billion to $274 billion. As a percentage of total federal spending, defense fell from 21.6 percent to 16.6 percent.

One of the House Republicans’ leading thinkers on debt and deficits, Budget Committee chairman Paul Ryan put the issue in clear percentage terms when he said last week, “The key is you bring the government (spending) down to 18, 19, or 20 percent of GDP.”

Last year, federal spending amounted to nearly 24 percent of GDP. 

To force spending down to where Ryan and other Republicans say they want it, two things are needed:

  • The first, obviously: cuts in spending.

At the economy’s current size, a cut of four percentage points of GDP would equate to $600 billion.

If Congress were to cut that amount in one year — and of course it won’t — it would be equivalent to eliminating all Medicare spending for a year, plus another $30 billion or so.

  • The second thing needed is a bigger national income, or GDP.

One reason federal spending measured as a percentage of GDP is so extraordinarily high — and so worrisome to the bond ratings agencies — is that the denominator in that equation, GDP, is smaller than it would be if the economy were healthy.

Anemic GDP growth
GDP didn’t grow at all in 2008, it shrank in 2009, and grew last year by less than three percent.

Here’s the dangerous dilemma which the CBO report presents: Deficit reduction would be healthy for the economy in the long term.

But in the short term, the spending cuts or tax increases that would produce smaller deficits “would decrease the demand for goods and services even further and thus reduce economic output.”

And if you’re looking for a job, that’s the last thing you need.

Of course, as of Monday night, the proposed spending cuts were very far from being enacted. Substantial cuts do seem closer than probably at any time since the 1997 budget deal between President Bill Clinton and congressional Republicans.

But much hinges on the 2012 election, which will be a mandate both on deficit reduction and on economic growth.

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Video: Democrats, Republicans promote separate plans

  1. Closed captioning of: Democrats, Republicans promote separate plans

    >> american people have been told there is a deadline looming next week. and if the nation's debt limit isn't fixed, we run the risk of financial armageddon, severe economic damage to our country, and not just our image. not everyone agrees with the premise, the two sides don't agree on the fix, and, again, tonight, the president goes on national television to make his case, right before the republicans come on television to make theirs. we begin our coverage here tonight with nbc's kelly o'donnell covering it all on capitol hill . kelly, good evening.

    >> reporter: good evening, brian . house republicans promise to have all the details of their new plan posted online by midnight tonight, so those frustrated people we just heard and anyone else can read it for themselves. then the race begins to try to get to the actual voting that could end this crisis. neither party is ready to blink. so there are now two competing plans. one proposal comes from speaker john boehner , who broke off debt talks with the president friday, but challenged mr. obama today.

    >> i think it would be irresponsible for the president to veto such legislation.

    >> reporter: senate democrats unveiled their own proposal, claiming house republican leaders cannot get the tea party wing to give.

    >> it appears to me at this stage the republicans are more interested in trying to embarrass the president than doing what's right for the country.

    >> reporter: despite the bitter tone, there is some common ground . neither plan raises taxes or cuts entitlement programs. the boehner plan requires two steps. first, raise the debt limit now by about $1 trillion, enough to last until early 2012 . match that with $1.2 trillion in spending cuts. second, a new bipartisan committee to find up to $1.8 trillion in additional cuts. if congress agrees to actually make those cuts, only then can the president request another debt ceiling increase.

    >> i would call this plan less than perfect, but it does ensure that the spending cuts will be greater than the hike in the debt limit.

    >> reporter: senate democrats and the white house back the reid plan, raise debt limit until 2013 , cut $1.2 trillion in spending now. also forms a new future spending cuts committee, reduce the deficit by $2.7 trillion, but that includes predicted savings from wars in iraq and afghanistan. at a speech today, the president walked the middle ground .

    >> neither party is blameless for the decisions that led to our debt. but both parties have a responsibility to come together and solve the problem.

    >> reporter: and one of the big issues for democrats is they say the republican plan would sort of expire before the president's re-election campaign, with another vote to raise the debt ceiling again, they say that would put us right back here. republicans say they need to guarantee that cuts would actually happen in the future to prevent more of a crisis. now, after all this wrangling, aides tell me the senior level negotiators in both parties are still talking, trying to find a way to close the gaps. and as you mentioned, brian , speaker boehner will follow the president tonight. he'll speak for about five minutes to lay out why he thinks his plan should get the public support. brian ?


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