Deficit Panel Reduction Recommendations

A CNBC.com article, Presidential Panel Releases Deficit-Reduction Proposals, provides a good summary of the preliminary recommendation from the bipartisan panel on deficit reduction. A final report is due on December 1, 2010.

Overall, I like the total package recommended. The recommendation has three major areas of focus:

Spending cuts. The proposal puts a cap on government spending at 21% of GDP, down from the current 24% of GDP. This includes reducing the 2012 budget to 2010 spending levels, lower defense and non-defense spending by $100 billion each by 2015, freeze government employee salaries for three years and reduce the federal workforce by 10%. Automatic cut would take place if Congress exceeds spending caps.

Tax code overhaul. The proposal eliminates $1.1 trillion of exemptions and deductions, such as the mortgage interest deduction. In addition, it will simplify and lower the tax rates paid by individuals and lower the tax rate paid by corporations.

Reduce health care costs. The proposal would reduce payments under Medicare and Medicaid, increase co-pays, and cap awards under malpractice suits.

The proposal also makes recommendations to ensure the long term viability of Social Security, but would be covered outside of the deficit reduction program.

The part I like best is the proposal to limit government spending at 21% of GDP. The limit will cause government to focus on being choiceful about spending and eliminating ineffective programs. Another positive point is that the limit will also cause government to put more effort on growing the economy since a higher GDP is the only way to increase the amount of funds available for spending.

I will be very interested in the debate and comments in the coming months.

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This is not financial or policy advice. Please consult a professional advisor.

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