It makes no sense to ignore the numerous and emphatic warnings from government officials and budget analysts of diverse perspectives, who agree that current fiscal policies are alarming over the coming decade and unsustainable over the long term.

• Federal Reserve Board Chairman Alan Greenspan recently observed that, "our budget position will substantially worsen in the coming years unless major deficit-reducing actions are taken." He added, "The fundamental issue is the need to make difficult choices among budget priorities, and this is becoming ever more pressing in light of the unprecedented number of individuals approaching retirement age."[1]
• U. S. Comptroller General David M. Walker has written that, "Absent significant changes on the spending and/or revenue sides of the budget ... long term deficits will encumber a growing share of federal resources and test the capacity of current and future generations to afford both today's and tomorrow's commitments. Continuing on this unsustainable path will gradually erode, if not suddenly damage, our economy, our standard of living and ultimately our national security.[2]
• In a December 2005 report, the Congressional Budget Office (CBO) found that, "economic growth alone is unlikely to bring the nation's long-term fiscal position into balance. Moreover, issuing ever-larger amounts of debt or dramatically raising tax rates could significantly reduce economic growth." According to CBO, "attaining fiscal stability in the coming decades will probably require substantial reductions in the projected growth of spending and perhaps also a sizeable increase in taxes as a share of the economy."[3]

It makes sense to heed these warnings and begin work on a serious deficit reduction plan that addresses the full magnitude of the problems we face. If history is a guide, however, not every plan that claims to reduce the deficit will make sense. There is certainly no such thing as the perfect plan. Each plan will reflect its sponsor's notions of the proper role of government, the relative emphasis that should be given to various government functions and the level of taxation that is appropriate to support them. To help sort through the strengths and weaknesses of deficit reduction plans -- separating the sense from the nonsense -- The Concord Coalition has established "Seven Signs of Fiscal Sense."

1. Does the plan achieve actual deficit reduction?

A true deficit reduction plan should achieve a deficit path that trends downward smoothly over the budget window with progressively smaller deficits year-by-year relative to current law; produces a cumulative deficit within the budget window that is smaller than what is projected under current law; and does not harbor a "cliff effect“ -- an abrupt explosion in the deficit just beyond the budget window. A budget plan that backloads deficit reduction is suspect since political and economic forces make outyear deficit targets less likely to materialize.

2. Does the budget plan build on realistic assumptions?

Estimates of current law deficits in the budget window and savings achievable through proposed policies should not be overly optimistic. A fiscally responsible budget plan must be based on realistic, attainable assumptions, and reject the use of procedural tricks and gimmicks to hide costs or circumvent budgetary limits. The projected costs or revenue loss of ongoing policies, such as the war on terrorism and relief from the alternative minimum tax, should be fully accounted for. Clever accounting does not fool the economy. Tax cuts that disappear or discretionary spending levels that improbably plummet have been contained in prior budget plans. Inclusion of such procedural smoke screens is a strong signal that a plan lacks credibility.

Recent experience has shown that Congress can limit discretionary appropriations only with extraordinary difficulty. A budget plan should not rest on the assumption that a future Congress and a future President will somehow defy previous experience by enacting heroic domestic spending cuts.

Experience has also shown that tax cut sunsets are not likely to take effect, and indeed are rarely intended to take effect. Their main purpose is to minimize the officially projected revenue loss of proposed policies. In doing so, sunsets confuse the fiscal outlook and complicate the tax code. Worst of all, they cynically avoid facing up to the fiscal consequences of today's decisions, leaving future generations to clean up the mess.

3. Does the budget plan contain offsets for new initiatives?

The first step in bringing the deficit under control is to stop digging the hole deeper. Rhetoric about deficit reduction will lack credibility if Congress continues to treat rising debt as a viable alternative to spending cuts or tax increases. Deficit reduction plans should only be taken seriously if new or expanded spending initiatives and new or extended tax relief is fully offset with spending reductions or tax increases.

The need for offsets is particularly important for initiatives intended to have long lasting effects, such as new entitlement spending and tax cuts not intended for immediate short-term fiscal stimulus. Projected entitlement benefits far exceed the revenues dedicated to pay for them over the long-term and account for the government's long-term structural imbalance. A plan intended to reduce the deficit should not create new entitlements that are not fully financed or offset, no matter how attractive they may seem.

Similarly, it makes no sense to go through the difficult process of cutting spending in the name of deficit reduction and then give back all the hard fought gains by cutting taxes -- leaving the deficit where it was or higher. Politically convenient rhetoric to the contrary, tax cuts do not pay for themselves. Their inclusion in a budget plan will reduce revenues and require offsets to prevent an increase in the deficit. If tax cuts are included in a budget plan, deeper spending cuts than otherwise would be required are needed in order to achieve a balanced budget. This invites political opposition; each spending cut can be challenged as being necessary to pay for a tax cut.

4. Does the budget plan achieve a path of sustainable deficit reduction beyond the forecast year window?

A fiscally responsible budget plan is one that achieves a smooth, sustainable path of deficit reduction during and beyond the budget window. Gaining control of the short-term deficit is only the first step in a far greater fiscal challenge. An explosion in entitlement spending associated with the retirement of the baby boom generation lurks just over the horizon. A sound budget plan must lay the foundation for dealing with the fiscal consequences of an aging population.

Tinkering piecemeal with the programs that support retirees -- chiefly Social Security, Medicare and Medicaid -- treats each as a separate and self-contained problem. This fosters the illusion that the rising cost of any individual program can be afforded without regard to how large or unsustainable the cumulative total becomes. A sensible budget plan should put benefits on a coherent, sustainable and affordable basis so that both beneficiaries and taxpayers can know what to expect in decades to come.

5. Does the budget plan share the burden of deficit reduction across generations and income levels?

All Americans will enjoy the fruits of a sound sustainable fiscal policy. Thus, no economic group except for the very needy should be exempt from contributing to eliminating the federal budget deficit. Those who can more readily shoulder the burden should be asked to do so. Narrowly targeted tax breaks or spending provisions for businesses or individuals do not belong in a deficit reduction plan. Even if fully offset, such political "pork" diverts resources from more pressing national needs and increases public cynicism about the fairness of the federal budget process.

Moreover, no generation should be exempt from shouldering some responsibility for this national problem. Programs and benefits for senior citizens comprise more than one-third of total outlays. Exempting them would place an even greater burden on our children and grandchildren.

6. Does the plan establish credible enforcement mechanisms?

Although process alone will never be able to solve the nation's fiscal problems, budget mechanisms can bring greater accountability to the budget process and help provide Members of Congress with the political cover to make the tough choices necessary to reduce the deficit.

The Budget Enforcement Act of 1990 (BEA) established caps on discretionary spending, and a pay-as-you-go limitation on entitlement spending and tax cuts. Statutory caps on discretionary spending helped hold spending flat from 1991 to 1996 and restrained its growth between 1996 and 2000. The pay-as-you-go rule (PAYGO) required anyone proposing major initiatives on either tax cuts or entitlements to answer the question: "How do you pay for it?" Forcing an answer to this simple question is perhaps the most sensible thing politicians can do in the short-term to restore fiscal discipline in Washington.

Renewing the pay-as-you-go rule for spending only, as some have suggested, would seriously erode its effectiveness. Spending and tax decisions both have consequences for the budget. There is no good reason to exempt either from fiscal scrutiny. Moreover, exempting tax cuts from PAYGO would encourage an expansion of so-called "tax entitlements" where benefits are funneled through the tax code rather than by direct spending -- an approach generally thought to be far less efficient.

By helping to constrain fiscal policy, statutory caps and PAYGO made a direct contribution to the more favorable budget outlook that developed by the end of the 1990s. The lesson to be learned from the overall success of these enforcement mechanisms is that budget process, while no guarantee, can be an important tool in achieving strategic long-term goals.

The statutory enforcement mechanism of the 1990 BEA has now expired. Congress will need a new set of rules to enforce any plan it may adopt to rebalance the budget. There are too many claims on too few dollars to declare that formal budgetary restraints are no longer necessary.

7. Is the plan politically viable over the long-term?

A serious sustainable deficit reduction effort will require all parties to compromise. Starkly partisan budget proposals may appeal to true believers and party loyalists, but a plan to reduce the deficit is unlikely to succeed over the long-term without sufficient political will to enforce it. A successful plan must be capable of resisting pressure to undo the tough choices it contains. The best way to ensure that a plan can stand up over time is to infuse it with broad bipartisan support from the beginning. This, in turn, requires that priorities be set and compromises be made. Everything must be on the table.