Washington D.C. (January 7, 2014) – The "Washington Consensus" on the federal budget process is grounded in faulty economic theory which leads to a fixation on reducing the debt and a focus on putting "everything on the table." This comes at the expense of growth-inducing investments and long-term economic health. A new approach to the budget is required to accomplish the dual goals of reducing the debt-to-GDP ratio and growing the economy.
An Innovation and Competitiveness-Centered Approach to Deficit Reduction, produced by the Information Technology and Innovation Foundation (ITIF), presents a comprehensive series of recommendations designed to focus federal policy on investments that promote growth. This includes reducing business taxes to spur investment, increasing federal funding for R&D, infrastructure and education, and making changes in entitlements to encourage Americans to work longer. At the same time Congress should cut unproductive spending (e.g., farm subsidies, oil and gas subsidies), while increasing personal income taxes and eliminating deductions.
“For too long, federal budgeting has sought to cut spending at the expense of long-term investments, with the sequester being the latest example,” says Robert Atkinson, Ph.D., President of ITIF and author of the report. “Instead, budget policy should focus on reducing the debt-to-GDP ratio which is a far better indicator of fiscal health. To accomplish this, we need to balance deficit reduction with targeted investments and corporate tax cuts that grow the economy over the long haul.”
To distinguish between taxes and spending that support investment versus consumption, policymakers should consider four criteria:
- Productivity: Does the program or policy encourage organizations to produce more goods and services with fewer inputs?
- Innovation: Does the program or policy encourage organizations to create new products, services, processes, or business models that add value or create new industries?
- Competitiveness: Does the program or policy reduce the trade deficit by making it more attractive to locate productive activity in the United States rather than other countries; thereby increasing exports and/or reducing imports?
- Work hours: Does the program or policy increase the amount of work hours per-capita by encouraging workers able to work to enter or remain in the labor force, including staying longer at the end of their working life?
Atkinson argues spending cuts should focus on programs that do not meet these criteria, while tax increases should be geared towards areas of the economy that have the least negative impact on innovation and competitiveness. For example, farm subsidies do not boost productivity but increased federal spending on research does. Likewise, certain personal deductions, like the mortgage interest deduction, hinder growth, while reduced corporate taxes boost competitiveness and productivity.
“It is clear that all spending and taxes are not equal. So with the limited funds available we must focus federal budgeting on the public and private investments and tax cuts that will have the greatest impact on long-term economic growth,” Atkinson adds.
The report builds on a previous ITIF report which assessed the competing economic doctrines underlying federal budget policy, arguing for an approach based on the doctrine of innovation economics.
The Information Technology and Innovation Foundation (ITIF) is a non-profit, non-partisan think tank whose mission is to formulate and promote public policies to advance technological innovation and productivity internationally, in Washington, and in the states. Recognizing the vital role of technology in ensuring prosperity, ITIF focuses on innovation, productivity, and digital economy issues. Learn more at www.itif.org.