With the next installment of the fiscal cliff looming, the U.S. government continues down an unsustainable long-term fiscal path. In the words of the National Commission on Fiscal Responsibility and Reform (Simpson-Bowles) in its December 2010 report, “The Moment of Truth”: “The problem is real. The solution will be painful. There is no easy way out. Everything must be on the table. And Washington must lead.”
The bottom line: Our massive debt and even larger long-term fiscal obligations cannot be met under current law. The Government Accountability Office has projected that, left unchecked, interest on the debt and Social Security alone would eat up 100 percent of federal revenue by 2040. This problem will not be solved by any one or even a combination of actions, such as growing the economy, reducing fraud, waste and abuse, wringing out additional administrative efficiencies, or making changes at the margin. We face gut-wrenching policy decisions on spending and revenue alternatives, and we must have a candid conversation about our national obligations, priorities and needed resources.
States have been facing their own fiscal challenges head on as they do not have the federal government’s vast borrowing power or the ability to print money. Kicking the can down the road was not an option. From the state experience, we identified 10 drivers that can facilitate meaningful deficit reduction.
1. Strong leaders drive consensus to make difficult and potentially unpopular choices. Governors, working with their legislatures, have driven difficult change. They had a sense of urgency that created partnerships, bridging political parties and constituencies.
2. Decision-makers understand the magnitude of the problems, where things stand, the range of options available, realistic trade-offs, time horizons, and the likely impact on fiscal stability and program delivery, both short and long term. This is facilitated through reliable, useful and timely financial and program information.
3. Decisions are made in the public interest broadly. Threats of government sequestration and shutdowns and long periods of continuing resolutions are tangible indicators of the gulf that now exists. Simpson-Bowles spoke of putting differences aside to forge a plan and reach a principled compromise.
4. Partnerships form across a spectrum of interests, between government and its employees, and between government and the business community to formulate meaningful solutions and gain consensus for what may be bold or disruptive change.
5. The public is fully informed of the nature and severity of the problem, the risks of not taking or delaying action, and the need for shared sacrifice. Elected officials will have to make the case to the public for the type of substantial change that will ultimately be required. Federal deficit spending has many critics, who are understandably concerned about the burden placed on future generations; but the programs that make up spending generally have broad constituencies and vigorous supporters.
6. Everything is “on the table,” especially given the nature of long-term structural deficits and the opportunity that crisis provides to make broad-based changes that otherwise may be more difficult to achieve. Everybody must recognize that the problem is so deeply entrenched there is no easy way out. Viable solutions will necessarily be painful.
7. Leaders look at new solutions. Slight tweaking of the status quo is unlikely to create the most successful outcomes. As Albert Einstein said: “We can’t solve problems by using the same kind of thinking we used when we created them.”
8. Gimmicks are avoided. The problem does not lend itself to short-term budget Band-Aids, but must focus on the drivers of federal spending and revenues. We are filling a rather large crater — not patching a pothole.
9. Fiscal performance is continually monitored, and midcourse corrections are made as needed.
10. Technology is fully leveraged to not only reduce costs and improve service, but also to inform the public on results and to encourage feedback and participation.
There are no easy answers to what will be difficult policy decisions to put the federal government on a sustainable long-term fiscal path. The current fiscal path has been constructed over decades and includes programs near and dear to many Americans, and thus will be difficult to eliminate.
Elected officials face the challenge of developing a strong, bipartisan plan to achieve long-term fiscal sustainability. An open dialogue with the American people on the components of reform and the need for shared sacrifice will be required. Americans have always been able to rise to big challenges when they understand the stakes and the risks to the well-being of our nation and future generations.
William Phillips is the principal in charge of KPMG’s Federal Advisory Practice, and Jeffrey C. Steinhoff is executive director of the KPMG Government Institute and former assistant comptroller general of the United States for accounting and information management. The views expressed are those of the authors and do not necessarily represent the views or professional advice of KPMG LLP.