As I stressed here, I’m critical of S&P’s decision to downgrade US debt— it’s a misguided move that has potentially serious consequences. Every “basis point”— one-hundredth of a percent— that interest rates go up on US Treasuries means another $1 billion of debt service expenses.
But the rating agency does raise some good points, both about recent political dysfunction and the need for revenues in any deal that can truly improve our fiscal outlook.
Here’s a picture that underscores these points.
The graph plots three scenarios of the debt as a share of GDP over the next decade.
–First, no new revenues from any tax increases, just the savings from the Budget Control Act (BCA–that’s the debt ceiling bill)–blue line;
–Second, no savings from the BCA, but new revenues from allowing the sun to finally set on the upper-end Bush tax cuts–red line;
–Third, both one and two: savings from the BCA and new revenues from the highend Bush sunset–green line.
Neither one nor two flattens the trend in the debt/GDP ratio, otherwise known as stabilizing the debt. But together, the debt ratio stabilizes.
In other words, the combination of the sun setting on the highend Bush cuts along with savings from the new bill do, in fact, stabilize the debt, at least in the 10-year budget window.
Outside that window, however, the debt begins to rise again as a share of our economy. If we want to lock in lasting stabilization, it would take a full sunset— not just the high end— of the Bush tax cuts along with the ultimate goal of long-term budget sustainability: slowing the growth of health care costs.
So while I still believe S&P screwed up big-time, I must also reluctantly thank them for underscoring a point my CBPP colleagues and I have been making for months. A deficit reduction package without revenues will not work. A package with revenues will.