The administration and Congress face the challenge of adopting fiscal policies that cut the deficit without placing at risk economic growth or essential programs that serve vulnerable populations. Restoring budget balance requires difficult choices among competing priorities, as well as efficient fiscal management. Over the long term, the federal government cannot continue on a path of large-scale deficit spending without jeopardizing the economic well-being of the United States. To achieve budget balance, it is essential to address both the revenue and spending sides of the budget. Ensuring adequate revenues may require that policymakers reexamine tax base-eroding provisions in the tax code, commonly referred to as tax expenditures. These should be reduced. Controlling spending also is essential to maintaining fiscal discipline. At the same time, it is important to protect the vulnerable segments of the population during this process.
During recessions, however, policies sustaining economic growth may take precedence over maintaining budget discipline. The federal government may incur short-term deficits to the extent necessary to promote economic recovery. At the state or local level, rainy-day funds accumulated during good economic times can sustain spending on needed programs.
To preserve essential services in a downturn, states often need to find new revenue sources just when family budgets are stretched thin. When revenue-increasing measures that are temporary, inherently unstable, or declining (such as taxes on tobacco, alcohol, and gambling) are tied to vital programs, those programs are jeopardized.
Pursuing Budget Balance: Policy
When economic conditions permit, states should accumulate budget reserves adequate to maintain services during recessions. The use of rainy-day funds should be restricted to times when revenues, adjusted for inflation, actually decline.
Cuts to avoid
The federal government must strive for long-term fiscal balance to forestall hardships that result from higher inflation, a falling dollar, higher interest rates, and the inability of government to fulfill its commitments, particularly to the most vulnerable or needy. The need to reduce long-term fiscal imbalances, however, should be tempered by the occasional need for short-term fiscal stimuli, emergency spending, and long-term investment.