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Review of “The Moment of Truth” Report of the National Commission on Fiscal Responsibility and Reform

Introduction

During the recent years the US has experienced fundamental changes in different areas of the country’s operations, both internal and external. The international conflicts, financial crisis that started in 2008, and the changes that followed afterwards have shaken the economy of the United States. The situation at that time implied radical decisions in order to stabilize the crushing system of the country. One of the choices was to increase the amount of borrowed financial resources from other countries. The decision to do this was necessary, however, without a thoroughly developed plan of repayments it has led to a great increase in federal debt. Over the years, frequent concerns arose in the governmental institutions regarding this issue that with time transformed into a crucial factor that could seriously influence the welfare of the whole country in the future.

The document introduced by the National Commission on Fiscal Responsibility and Reform (NCFRR) implies many different concerns regarding the present and future dilemmas. Firstly, the document provides a detailed analysis of the country’s situation in terms of the budget deficit and ever-increasing federal debt. Secondly, it announces predictions of the possibilities of future problems if this issue is not handled with appropriate importance. Finally, the document introduces a detailed plan of possible actions, created by the NCFRR, which promotes specific actions, reforms and appropriate changes to improve the situation with budget deficit and federal debt of the US government.

Having studied the main concepts of this proposal, I should say that I disagree with the most of the stated points. Even though some points are quite interesting, well thought over and could certainly introduce positive changes in the economic issue, the general recommendations appear to be less possible to implement and realize. Generally, from the business perspective, the main ideas of this long-term plan are similar to the features of the generic strategy of a cost reduction model, often used by corporate companies, but in this case roughly adjusted to the whole economy of the country. The fundamental idea of this model relates to changes in the inner operations of an organization to reduce the cost of production, which is meant to increase profits (Porter). The problem of this approach and mainly the whole proposal is that it is not meant to work appropriately in a long-term for the US economy – deductions, higher taxes and other actions introduced in the document might be reject by the citizens due to their durability.

Basic Principles of the NCFRR’s Proposal

The mission of the proposal by the NCFRR acts as an important focus for the economy of the US – “to bring the national budget into primary balance (balance excluding interest costs) in 2015, and to meaningfully improve the long-run fiscal outlook” (NCFRR 12). With these directions and with the consideration of some basic principles of developing such policies, the Commission has developed a six-part plan to put the country back on a path of fiscal health and establish higher growth in economy. The six parts are discretionary spending cuts, tax reforms, health care savings, social security changes, process reforms and other mandatory policies. Main result of this plan promises an achievement of nearly $4 trillion in deficit reduction before 2020; reduction of economy’s deficit to 2.3% of GDP by 2015; stabilization of debt by 2014 and its constant reduction to 60% of GDP by 2023 and 40% by 2035 etc. Each of the six parts introduces a number of different actions that should be discussed in detail.

Discretionary Spending Cuts

According to the information provided in “The Moment of Truth” report, the discretionary spending has increased greatly (up to 64 % in 2010) due to a number of new governmental programs, some of which present poor results and do not provide the required profits, however, are still being financed by the government. The definite waste of national resources cannot be tolerated. Due to this issue, the NCFRR developed a series of changes in its plan that can be summarized in two main points. The first one states that in order to generate better resource usage the government needs to review its operations and according to the obtained results close the projects that do not generate appropriate results and target funding towards those programs that demonstrate real measurable results. The second point declares an introduction of limitations – an amount of money that can be spent on a certain type of discretionary spending. The reduction of the discretionary spending includes both defense and nondefense cuts and is stated to be approximately $1.7 trillion of savings in a long term.

Recommendations of the commission regarding this issue are quite versatile. For instance, the ones that concern measures regarding the complete economic operations of the country point out good ideas. One of such recommendations is the “Cap discretionary spending throughout 2020”, which points out a problem of money deficit and declares that to solve this issue the country requires gradual nominal cuts that are to be increased year by year till 2020 with appropriate limitation on the agencies’ spending. By working with the Office of Management and Budget (OMB), governmental departments are required to identify the exact budget limits within which they can operate appropriately and generate good results. However, other reforms are mostly connected to raising funds through limiting spending of the federal government. Even though these measures can bring positive changes and show real money savings, they cannot provide the required amounts even on a long term. Furthermore, it is possible that if such recommendations are implemented it will require more resources to introduce these measures than actually receive money gains from them.

Tax Reform

The second part of the NCFRR’s report relates to changes in the taxation policies of the US government. In general, these are focused on gradual changes of tax code regarding important spheres of the economy of the US. This should generate additionally $1 trillion in cumulative revenue to repay the borrowed financial resources. While the report actually states the reduction of tax expenditures and lower marginal tax rates, it also introduces a recommendation of eliminating more than 150 tax deduction provisions. NCFRR proposes that the overall progressivity of the federal tax system should be the basis for fundraising and not the additional fees assigned by law and mostly affect the lower and middle classes of the society. The tax reform should also open possibilities of building national business in order to create jobs for the nation. The Commission also recommends an additional 15 cents tax on gasoline per gallon to generate additional funds.

In general, the recommendations of the tax reform are directed at simplify the tax system in order to reduce the amount of unnecessary spending and irrelevant reductions. The recommendations related to such points as the “Enactment of fundamental tax reform by 2012” (NCFRR) and the “Enactment of corporate reform” (NCFRR) provide positive features to the current system of taxations (ex. cutting tax expenditures and establishing single corporate tax rate between 23 and 29 percent). These plans sound like quite interesting and positive changes to the overall tax system and may improve the situation regarding national debt; however, some features such as the elimination of more than 150 tax deduction provisions may result in some individually based problems.

Health Care Savings

According to the program introduced in “The moment of Truth” report, reduction in the healthcare sector achieved through different reforms to Medicare and Medicaid could generate the amount of $340 billon dollars directed to decrease the amount of the national debt. The Commission states that these results can be achieved through reforms of both formula for physical payments - the Sustainable Growth Rate and the Community Living Assistance Services and Supports Act. This can generate the previously mentioned forecasted savings amount. Furthermore, there are recommendations regarding changes in the federal budgeting of the healthcare sector.

The overall idea about changes in the health sector is quite predictable due to requirements of the sector. However, the reforms that the Commission is offering are quite radical and can generate additional long-term expense. For instance, the rejection of the CLASS Act (NCFRR) or its reformation as recommended by the Commission can lead to an increase in the deficit over the next decade. Perhaps, such an action could be quite beneficial in the future but without a thoroughly prepared replacement of the CLASS Act, this can lead to a multitude of problems in the sector, especially with the lack of funds.

Social Security Changes and Other Mandatory Policies

In its plan of reforms NCFRR has determined a specific set of changes regarding the Social Security Sector, where it forecasts the realization of about $240 billion in cumulative saving. Its analysis states that the situation of the US economy faces a great problem within this sector. The total number of the labor force in the country is constantly decreasing, whereas the number of retirees that receive their benefits from the taxes paid by current workers is increasing. The tendency currently results in huge losses for the nation’s income and in future can result in even greater deficits. The Commission’s plan recommends a gradual increase of the retirement age from 67 to 69 by 2075 through reduction of benefits of middle and high-income individuals. In addition, the plan includes a reform that is bent on increasing the social security tax for wealthier individuals.

Such changes in the economy of the country are quite necessary. The reforms, introduced by the NCFRR in the Social Security Sector are well-developed and thought over. The proposed changes can seriously influence the whole economy of US in a positive way not only by generating additional resources from reducing the spending on bonus funds for certain groups of people but also by increasing the nation’s profits through the Age Retirement reform.

Process Reform

The rest of the recommendations in the NCFRR report relate to additional changes in the economical processes.

The most important ones are the following:
  • Focus on chained CPI when evaluating the measure of inflation for indexed provisions;
  • Reviewing of budget-scoring practices;
  • Implementation of a new mechanism for providing unemployment benefits.

These measures are additional; they support previous reforms of the plan and raise a certain amount of savings, but their financial benefit to the overall issue with the national debt is quite small.

Conclusion

“The Moment of Truth” report of the National Commission on Fiscal Responsibility and Reform introduces some interesting ideas regarding the ways to solve the issue of the national debt. Some points promote reforms bent on sufficient changes in the structure of the economy and the government system while others focus more on certain administrative changes in the government. Nevertheless, all these recommendations are focused on the mission of raising funds to stabilize the country’s deficit in the long term.

Most of these reforms are economically justified; they can achieve the required results when implemented. However, the most important concern is that they are aimed at the long-term fund risings and certain unpleasant changes in some sectors of economy. Thus, it is quite uncertain that the nation will be willing to cope with high standards and demands of such reforms over the long period. Surely the problem of the federal debt requires a set of working tools to solve it. “The Moment of Truth” report contains a plan that can become the basis for the solution of the problem, however, some crucial issues require revaluation and that is why I personally consider this proposal extremely hard to be realized by the country.

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