Photo by Getty; Illustration by Bloomberg View
Photo by Getty; Illustration by Bloomberg View

Calling on Congress to pass a limited package of spending cuts and tax changes, U.S. President Barack Obama gave lawmakers license this week to go small and leave the big, bad kahuna of deficit reduction for another day.

He’s right. Congress should move quickly to come up with $85 billion to offset the first installment of the $1.2 trillion in mandatory across-the-board budget cuts, which will go into effect March 1.

Kicking the can isn’t generally the best policy. And though $85 billion might not seem like much, it would be another in a series of payments steadily chipping away at a projected $845 billion federal budget deficit. More important, it would limit the economic pain and slapdash policy choices that would inevitably accompany the cuts required under the so-called sequester -- $55 billion from the Pentagon budget and $30 billion from other government programs. That scheduled fiscal tightening is projected to slow economic growth, keeping the jobless rate near 8 percent through 2013, according to the Congressional Budget Office.

So how do we get there? The soundest approach would aim for a mix of spending cuts and tax increases, perhaps $2 in cuts for every $1 of tax increases.

Closing the carried-interest loophole would be a good place to start and would raise about $14 billion over 10 years. Charging the hard-rock mining industry cleanup fees and royalties could raise $3 billion more. Eliminating special tax breaks for the oil and gas industry could bring in $35 billion, and limiting farm subsidies, many of which flow to agribusiness, could generate as much as $25 billion. The government could also limit additional tax deductions for wealthier earners, either by capping the amount they can deduct or converting some deductions into flat tax credits.

There are other places to look for savings. Obama’s budget presents more than $360 billion in savings from Medicare, and, as we’ve outlined, the Defense Department could withstand as much as $500 billion in fat-trimming -- provided the cuts are, unlike the sequester, carefully targeted. Other cost-cutting measures include allowing the Pension Benefit Guarantee Corp. to raise the premiums it charges employers to protect their pensions, a move the Simpson-Bowles fiscal commission estimates would save the nation $16 billion through 2020.

It’s worth remembering that this won’t be the end of it. An additional $1.1 trillion in across-the-board cuts are scheduled to kick in starting next year. Lawmakers will ultimately have to decide whether -- or how -- to offset them. As the Congressional Budget Office reported, even the sequestration’s full $1.2 trillion in deficit reduction won’t be enough to fix the nation’s debt woes. Over the next 10 years, debt held by the public is projected to be “significantly greater” relative to gross domestic product than at any time since just after World War II, ballooning to 77 percent in 2023.

The real culprit is the unsustainable rate of spending on Medicare, Medicaid and Social Security. Shoring up those safety-net programs is a task that Congress must eventually embrace. But there’s little chance of a grand solution before the sequester begins wreaking havoc on the budget.

Despite the theatrics, lawmakers have found ways to work together to reduce spending. In fact, in the past two years, Congress has found more than $2 trillion in deficit reductions over the next decade. The deal in January to avert the fiscal cliff increased taxes on wealthy Americans. Meanwhile, the CBO’s recent deficit report shows spending will remain relatively stable, at about 22 percent of GDP, over the next decade.

Congress has increasingly relied on short-term fixes for fiscal messes of their own creation. That’s no way to run a country. But neither, as Obama put it, is subjecting a weary nation to more “self-inflicted wounds.” Lawmakers can surely find $85 billion in cuts without goring the economy in the process.

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