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By Leon E. Panetta and Bill Gradison Jr.
Former Secretary of Defense and Director of the CIA; Served in the House of Representatives from 1975-93
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Fiscal responsibility has never been for the faint of heart. It's easy to talk about the need to fix budget deficits and strengthen the economy for the next generation; it's another thing entirely to get the job done.
But Moody's downgrading the U.S. debt provides an immediate reminder that time is running out. We now have all three rating agencies warning about our fiscal situation—no surprises there given that debt as a share of the economy is about to surpass our all-time record, and our nearly $2 trillion annual deficit is larger than spending on defense, Medicaid, and veterans' benefits combined. But our current 10-year plan is nonetheless to add more than another $20 trillion to borrowing and while political leaders may try to ignore these warnings, as seen from whipsawing Treasury markets, our lenders will not.
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The run-up in the 10-year yield last month from a recent low of 3.9 percent to 4.6 percent in just a few days was a nasty reminder that while we may have grown used to low interest rates, there is no guarantee that they will stay low. And with a $29 trillion debt, one-third of which will turn over in the next 12 months, higher rates quickly lead to higher interest payments on the debt—already the second largest item in the budget.
Furthermore, the very fact that rates increased along with a sell-off in U.S. stocks and the dollar is worrying in that normally, signs of economic weakness lead to lower interest rates as investors flee to safety. If we lose that "exorbitant privilege," where investors gravitate toward Treasurys as a safe haven, a fiscal crisis—with a vicious cycle of higher rates, higher debt payments, and more borrowing—might be closer than any of us are prepared for.
Changing course will need leadership. It will need bipartisanship. And, ultimately, it will need a concrete plan.
We should start by returning to actual budgeting. We haven't passed a real budget in 10 years. We need to budget with comprehensive program priorities, spending levels, a pay-for plan, and a fiscal target—something that would demonstrate fiscal progress, against which policy changes could be evaluated.
Treasury Secretary Scott Bessent has laid out the administration's goal of bringing the budget deficit down to 3 percent of GDP, from its current non-emergency record of over 6 percent. We endorse this goal.
It will require us to reduce deficits by about $8 trillion over the coming decade, which is about five times more than the Fiscal Responsibility Act, which in itself was the single largest deficit reduction plan in more than a decade. We'll need even more savings if the current reconciliation bill adds to the debt as it is expected to but less if growth is higher—there are credible estimates that growth could cover as much as $700 billion of tax cuts. The best way forward would be to put together a package of pro-growth, pro-work, and pro-efficiency policies that have at least $2 of savings for every $1 of costs.
Getting there won't be easy, but it is the price we pay for ignoring the fiscal warnings in years past. We must stop demagoguing Social Security and find a fix so the program doesn't become insolvent. A plan might include things like raising the retirement age for younger workers, means-testing benefits for the well-off, altering how inflation is calculated, and/or lifting the payroll tax cap. Likewise, Medicare needs reforms—everything from reducing wasteful overpayments for Medicare Advantage plans to more structural changes like shifting to a premium-support model should be on the table. To start this conversation, our leaders need to acknowledge that we have to make changes to save these important programs rather than burying their heads in the sand.
We will also need to find savings from national defense, including by reforming the procurement process, and we need to reform discretionary spending and welfare programs to root out waste, redundancies, and outdated programs, while extending spending caps that expire at the end of this year.
Revenues will have to be higher. One pro-growth way to do this is drastically shrink the number of spending programs that are run through the tax code, many of which have the perverse effects of driving up the costs of things they are claiming to make affordable, as they do in housing, higher education, and health care. All told, there are over $20 trillion of spending-like tax breaks over the budget window, enough that if we are aggressive, we can broaden the base, lower rates, and raise more revenues.
The fixes will not come from either party alone; they are too easy to attack, and the effort will need to be bipartisan to provide the necessary political cover. It took both parties to get into this mess—three-quarters of the debt can be attributed to bipartisan legislation over the last 25 years—and it will take both to get out of it.
Leon E. Panetta served as secretary of defense and director of the CIA in the Obama administration, as White House chief of staff and director of the Office of Management and Budget in the Clinton administration, and in the House of Representatives from 1977-93.
Bill Gradison Jr. served in the House of Representatives from 1975-93.
The views expressed in this article are the writers' own.
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