The State of the Union: What We Hope to Hear

On January 28, 2014, President Obama will deliver his annual State of the Union address to Congress and the American people. This is always one of the Presidents most important speeches of the year, intended to offer an assessment on the current state of the country, as well as lay out his agenda on a range of important issues. As the President puts forward policy proposals, we hope he will highlight the importance of fiscal responsibility and make clear that our long-term budget challenges remain unsolved. Specifically, the President could do the following: FOUNDERS
ERSKINE BOWLES AL SIMPSON

CHAIRMEN
MICHAEL BLOOMBERG JUDD GREGG EDWARD RENDELL

STEERING COMMITTEE
PHIL BREDESEN KENT CONRAD DAVID COTE PETE DOMENICI VIC FAZIO JAMES B. LEE, JR. JIM MCCRERY SAM NUNN JIM NUSSLE MICHAEL PETERSON STEVEN RATTNER ALICE RIVLIN SCOTT SMITH ANTONIO VILLARAIGOSA TIM WIRTH ROBERT ZOELLICK

1. Remind the Public That Our Debt Problems Are Not Yet Solved. With annual deficits in decline and debt levels projected to stabilize as a share of GDP for a few years, it will be tempting to conclude that the nations fiscal problems are solved. The President should instead use the State of the Union address to remind the public and Congress that while weve made important short- and medium-term gains, our long-term debt problem remains a threat. He should explain that at 74 percent of GDP, debt levels are currently the highest they have been since the aftermath of World War II, and after a brief lull, they are expected to begin rising again later in this decade and exceed the size of the economy in the next two to three decades. He should also explain that failing to address our long-term debt trajectory can have harmful or even devastating consequences, including slower economic growth, higher interest rates, less flexibility, an increased burden on future generations, and the potential for an eventual economic crisis. It will require Presidential leadership to put this issue back on the national agenda. 2. Present Ideas to Make Entitlement Programs More Sustainable. The President should use the State of the Union to offer policy solutions to help ensure that Social Security, Medicare, and Medicaid remain solvent and strong for future generations. He should reiterate his support for the proposals he has already made, such as pegging cost-of-living adjustments to a more accurate measure of inflation, reducing and reforming certain Medicare provider payments, and increasing Medicare premiums for wealthy seniors. In addition, he should propose new ideas to help improve the delivery and cost-effectiveness of health care and to make adjustments for an aging population. Making changes to these important programs sooner rather than later is important to strengthen them and protect those who depend on them most. 3. Call for Comprehensive Tax Reform to Encourage Growth and Competitiveness. President Obama should call for comprehensive individual and corporate tax reform in his State of the Union address, and he should express support for the tax reform efforts already underway in Congress. He should explain how tax reform can improve fairness, reduce complexity, decrease compliance costs, foster competitiveness, help grow the economy, and help to reduce deficits and

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debt. Tax reform will require Presidential leadership and engagement President Reagans State of the Union speech in 1984, where he announced that the Treasury Secretary would begin working on a tax simplification plan, helped launch the tax reform effort that eventually led to the comprehensive changes in 1986. The White House will have to engage on this issue for there to be real progress. 4. Offer Ideas for How to Pay for New Proposals. The United States has many unmet needs, and President Obama will no doubt propose new initiatives to address them. Policymakers should not shy away from making new and important (but well-targeted) investments, but they must not add to the deficit in doing so. President Obama should therefore offer ways to pay for the cost of proposals he puts forward, either with new revenue or with lower spending. The first rule of fiscal responsibility is to do no harm at minimum we should not be making our debt situation worse. We commend the President for his record of identifying ways to pay for many of his past proposals, and he should continue to stick to this pay-as-you-go-principle. 5. Explain the Important Connection Between Jobs, Economic Mobility, Competitiveness, and the Debt. We expect the President to focus much of his address on some of the most immediate economic challenges, including increasing jobs and economic mobility in the United States. Instead of trying to sideline fiscal challenges, the President should explain how interconnected these issues are to the mounting debt, and dismiss the false choice between economic growth and responsible budgeting. For instance, he should explain that high debt levels can ultimately hurt mobility by slowing wage growth, increasing the cost-of-living for Americans, and making it more difficult for middle-class families to borrow for important investments in homes, education, and new businesses. The President should explain that reforming our unsustainably growing entitlement programs not only makes those programs more viable for future generations, but allows us to invest in priorities, such as education, that are central to encouraging economic mobility. Reforms can be done in ways that slow the growth of government subsidies that go disproportionately to higher earners, offer new protections and enhancements for low-income families, and do more to reward individuals who work and save. Meanwhile, comprehensive tax reform can equalize the playing field by closing preferences that go mainly to the highest earners, lower rates and improving simplicity for everyone, and ultimately accelerating economic growth. A long-term fiscal plan can also provide individuals and businesses with a greater level of certainty and confidence, which itself can provide an economic boost. The President should show how the debt affects the issues on which he is most focused, rather than turning away from this part of the economic challenge. No one expects the Presidents State of the Union to focus exclusively on the issue of the debt, nor should it. But the President should recognize the importance of gradually bringing down our elevated debt levels, and the sooner we have a plan for how to do that, the better. We hope the President will use the State of Union to make clear the challenges and trade-offs the country faces, and make the case to Congress that real solutions come from working together on a bipartisan basis for the greater good. The President should explain that everyone will have to make modest sacrifices, but that these sacrifices are necessary for the good of future generations. In doing so, President Obama can demonstrate his willingness to lead on a comprehensive deficit reduction plan that will help us to achieve a more prosperous future. 1899 L Street, NW Suite 400 Washington, DC 20036 (202) 596-3597 www.fixthedebt.org Page 2