According to Peter Orszag, the nation faces two deficits: a job deficit in the short term and an unsustainable budget deficit over the long term. These are opposing forces and attempting to secure one could exacerbate the other. Orszag argues that the best approach is a compromise wherein tax cuts are extended for two years and then are completely ended.
The projected deficit for the year 2015 is 4-5% of GDP. A sustainable level is about 3% or lower. Thus, the nation needs to reduce the deficit by 1-2% of GDP, about $200-400 billion a year, by 2015.
Half of the budget by 2015 will go towards health care (Medicare and Medicaid) and Social Security, both of which could use reform according to Orszag. The recent health care reform bill included substantial savings. Reforming Social Security would generate little savings as any plan would include benefit changes to avoid harming beneficiaries. The other half of spending consists of net interest and discretionary spending. The latter is split between defense and non-defense spending.
With all this spending, it might be tough to save more than half a percent of GDP by 2015. Orszag states that additional revenue, about 0.5 to 1.5 percent of GDP, is necessary to reduce the deficit. This can be achieved through revenue-increasing tax reform. Tripling the current 2% payroll tax holiday to 6% would amount to about 2% of the GDP—about $3,000 for each family earning $50,000 a year. Allowing the tax cuts to expire by the end of 2012 would lower the deficit by more than $3 trillion.
Orszag asserts that one of the most important contributors to the nation’s long term deficit is the cost of health care. The Affordable Care Act contains numerous tools to contain cost growth. Making use of these tools will help stifle health care costs. Conjointly, reforming Social Security would help stabilize the economy.