Getting Uncle Sam off the path to fiscal ruin
Dodaro said the government is on an unsustainable fiscal path, which will soon see interest payments of the federal debt becoming the single largest budget item. What does Dodaro suggest to fix the situation?
To address the growing federal debt and put the government on a more sustainable fiscal path, policymakers will need to consider a long-term plan that addresses the entire range of federal activities including both revenue and spending. A long-term fiscal plan could include fiscal rules and targets that promote fiscal sustainability by imposing numerical guidelines on the budget (known as targets).
Types of fiscal rules include:
Budget balance rules that constrain deficit levels,
Debt rules that limit public debt as a percentage of GDP,
Revenue rules that set ceilings or floors on revenues, and
Expenditure rules that limit spending.
Fiscal rules have been used by the United States and other countries to help promote fiscal sustainability. For example, the European Union’s stability and growth pact combines different rules, which are designed to ensure that countries in the European Union pursue sound public finances and coordinate their fiscal policies.
Rules can be designed to balance flexibility and enforceability. For example:
Fiscal rules can include clauses allowing for flexibility to help respond to fiscal risks or unexpected events like recessions or natural disasters.
Institutions like independent fiscal councils can help formulate and implement sound fiscal policy.
Correction mechanisms can be designed to trigger automatically to respond to past deviations from the rule.
It will be important that any future U.S. fiscal rules target the right factors, enforce budget agreements, and limit exemptions. A fiscal target that sets a common goal to control the debt, and well-designed rules that form a path to achieve that target, could form part of a long-term plan for fiscal sustainability.
Dodaro also warns Congress about how it treats the debt limit:
Failure to increase or suspend the debt limit in a timely manner disrupts the market for Treasury securities and can increase borrowing costs. Congress should consider alternative approaches to the debt limit as part of a long-term fiscal plan. GAO has recommended possible alternatives such as linking action on the debt limit to the budget resolution.
You can read the entire, ugly truth about the government's fiscal mess here.