Policies to reduce the budget deficit are likely to reduce economic growth in the near term, thus most economists suggest an approach that has a small effect initially, but is generally seen as resulting in significant deficit reduction over time. To summarize, the following are generally agreed to be elements of a successful package:
- credible deficit reduction plan that has a larger impact in the medium to long run
- does little harm or promotes long-run economic growth (i.e., does not discourage increases in human capital, physical capital, or technological development)
- accounts for non-economic values (people may differ on these; they may include phasing in changes to programs like Social Security, Medicare, etc., since current retirees and those approaching retirement made plans based on the current system; also, there are issues of efficiency vs. equity, ...)
Other programs can be changed as well, but tax changes and reducing the growth of entitlement spending are essential components of any credible deficit reduction plan. The question remains, will there be the political courage to make the tough decisions and the necessary compromises?