6. Do Not Perpetuate Budget Myths.
Elected officials should be careful not to perpetuate budget myths. Too often, these myths are used to justify fiscally irresponsible actions or inaction. Some of the most common myths include:
• Deficits and debt do not matter.
In fact, deficits constrain choices and bring into question policy and economic viability. Although high deficits may not be problematic (or could even be beneficial) in any given year, the historical and cross-country evidence suggests that high debt levels are indeed dangerous.
• Tax cuts pay for themselves.
It is true that certain types of tax cuts – particularly those which reduce marginal rates – can have economic benefits that reduce tax revenues less in dynamic modeling than in static modeling. However, a smaller decrease in revenues is still a decrease in revenues. There are no historical examples nor is there a theoretical basis to suggest that any major tax cut today could raise enough feedback revenue to fully offset itself.
• We can grow/recover our way out of debt.
It is true that today’s deficits are bigger as a result of the economic downturn. However, even after the economy recovers, the deficit will still remain and will be growing. According to the Congressional Budget Office, less than one-third of the 2012 deficit is due to structural weakness; and despite CBO’s projections that the economy will recover by mid-decade, their current policy projections still show debt growing by decade’s end. After the recovery, faster-than-projected growth would certainly help the fiscal situation; but because the largest spending programs – Social Security and Medicare – tend to grow as the economy does, and even at faster rates, there is no plausible level of economic growth that can get us out of our fiscal problems.
• We can solve our debt situation by cutting waste, fraud, abuse, earmarks, foreign aid, and/or the tax gap.
The real drivers of the debt have little to do with these issues, and instead are the result of growing entitlement costs and the failure of revenue to keep up. Improving government efficiency and better targeting discretionary spending can help improve the situation on the margins – and should be pursued in any event – but should not be seen as a panacea.
• Medicare and Social Security are earned benefits and therefore should not be part of deficit reduction.
In reality, Medicare and Social Security are structured such that the taxes paid by participants are nowhere near sufficient to pay for the benefits they are scheduled to receive. In other words, beneficiaries receive far more than they ever paid in, even adjusted for inflation. Since current promises made by Social Security and Medicare are unsustainable, leaving these two programs untouched would require neglecting other important government priorities in areas such as education,defense, and infrastructure.
• There is such a thing as a free lunch.
There is no magic bullet that can somehow maintain government benefits and services, maintain overall tax burdens, and put the debt on a sustainable path. To be sure,there are policies which can make government more efficient and help promote economic growth; but no policy change or programmatic reform can make everyone better off at the same time.