Thursday marks the beginning of the new fiscal year, and while there are achievements to celebrate, we have a serious failing to fix. Indeed, we may require a new fiscal year resolution.
To start, we can look back and appreciate the professional judgment, perhaps aided by a bit of good fortune, that enabled the Federal Reserve, Treasury, FDIC, two presidents and Congress to act boldly to mitigate the effects of the financial meltdown on the U.S. and world economies.
However, we did so by digging a much deeper fiscal hole. The extraordinary measures adopted by federal agencies and the fiscal stimulus legislation were layered on top of policies that already had the country on an unsustainable path. Under the combined new and old policies, we added $1.4 trillion, or more than $4,500 per person, to the public debt in the last fiscal year alone.
As the economy begins to revive and the stimulus winds down, the outlook for debt gets worse, not better. The public debt as a share of national income is projected to rise from 41 percent in 2008 to 68 percent in 2019. This will happen, even if the economy recovers fully, no new spending programs are enacted, the Bush tax cuts are permitted to expire, and no new crises occur. Beyond that, current policy will push up future deficits as a share of national income for as far as the eye can see.
Unconstrained growth in public debt could trigger more financial instability. This could happen, for instance, if foreign investors lose confidence in the credit quality of the dollar. As the current crisis shows, financial market shocks affect our lives in fundamental ways: lost wages, unrealized education plans and family disruption.
Continued deficits also undermine our ability to deal with future adversity, including climate change, the next economic shock or health pandemic.
We urgently need to break the federal fiscal habit of increasing spending and borrowing to pay for it. Like the family that discovers its debts are growing faster than income, we need to adopt a new year's fiscal resolution. But it needs to be one we can sustain.
Experience tells us some types of resolutions are easier to keep than others. We know that the more specific and measurable our goals, the more likely we will reach them.
One action each of us could take would be to urge Congress to adopt legislation now to stabilize the public debt as a share of national income by an established future date. Such a goal would be specific, measurable, and feasible. The process of adjustments could begin now.
But as citizens, we need to recognize that in asking the government to adopt a fiscal diet for our nation's health, we would also be asking Congress to take away our punchbowl and cookies. Lower federal spending and higher taxes today may be a necessary sacrifice if we are to sustain our resolution.
The Peterson-Pew Commission on Budget Reform, a nonpartisan group of federal budget experts, has been working since January to develop recommendations that would foster long-term fiscal stability.
It is too soon to speculate about the specific content of their recommendations, but it is natural to expect their proposals will attempt to rebalance fiscal resources with spending. If their recommendations are to be effective, they inevitably will require us to reduce our demands on government to levels that we are willing to pay for.
New year's resolutions are usually about correcting our overindulgences and are rarely pleasurable. But we know that making and keeping them is in our best long-term interest.
Marvin Phaup is director of Pew Charitable Trust's Federal Budget Reform Initiative.